-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OKa0EBVADGVdw3ewcLXrD+Ir2o9q6DyGaZgCaiFG4OvIBIV7Ydx29fq6qnEdO+/q MrmNJkeCdT65ZezCEi53MQ== 0001047469-97-004764.txt : 19971117 0001047469-97-004764.hdr.sgml : 19971117 ACCESSION NUMBER: 0001047469-97-004764 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971114 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: PALFED INC CENTRAL INDEX KEY: 0000793075 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 570821925 STATE OF INCORPORATION: SC FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-15334 FILM NUMBER: 97719020 BUSINESS ADDRESS: STREET 1: 107 CHESTERFIELD ST S CITY: AIKEN STATE: SC ZIP: 29801 BUSINESS PHONE: 8036421400 MAIL ADDRESS: STREET 1: PO BOX 1116 CITY: AIKEN STATE: SC ZIP: 29802 10-Q 1 FORM 10-Q FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ----------------------------------- Quarterly Report Under Section 13 or 15 (d) of the Securities Exchange Act of 1934 For the quarter ended SEC Commission File September 30, 1997 Docket Number 0-15334 - ---------------------- ----------------------- PALFED, INC. - ------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) South Carolina 57-0821295 - ------------------------------- --------------------------- (State or other jurisdiction of (IRS Employer incorporation or organization) identification number) 107 Chesterfield Street South 29801 Aiken, South Carolina (Zip Code) (Address of principal executive office) Registrant's telephone number, including area code: (803) 642-1400 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes..X... NO...... There were 5,299,201 shares of Common Stock outstanding on September 30, 1997. PALFED, Inc. --------------------------------------------------- Quarterly Report on Form 10-Q For The Quarter Ended September 30, 1997 Table of Contents PART I--FINANCIAL INFORMATION ITEM PAGE ------ 1. Financial Statements Consolidated Statements of Financial Condition as of September 30, 1997 and December 31, 1996....................................... 3 Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 1997 and 1996................................. 4 Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 1997 and 1996................................. 5 Notes to Consolidated Financial Statements.................. 7 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................................. 11 PART II--OTHER INFORMATION Item 5. Other Information............................................. 16 6. (a) Exhibits.................................................. 16 (b) Reports on Form 8-K....................................... 16 Exhibit 11.1...................................................... 17 SIGNATURES........................................................ 18 Consolidated Statements of Financial Condition (Unaudited)
PALFED, Inc. September 30 December 31 and subsidiaries 1997 1996 ------------ ------------ (in thousands, except share data) ASSETS Cash and due from banks.............................................................. $ 9,855 $ 16,942 Interest-bearing deposits with other banks........................................... 6,613 3,465 Investment and mortgage-backed securities: Available-for-sale............................................................... 22,925 24,007 Held-to-maturity................................................................. 50,682 58,700 Loans held-for-sale.................................................................. 9,327 11,241 Loans receivable, net................................................................ 540,712 512,879 Investment in real estate, net....................................................... 11,278 13,501 Investment in Federal Home Loan Bank stock........................................... 3,479 10,884 Premises and equipment, net.......................................................... 5,837 5,958 Accrued interest receivable.......................................................... 3,920 3,835 Other assets......................................................................... 3,876 3,845 ------------ ------------ $ 668,504 $ 665,257 ------------ ------------ ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Noninterest-bearing accounts................................................. $ 33,597 $ 30,577 Savings and NOW accounts..................................................... 126,976 121,432 Certificates of deposit...................................................... 406,339 384,678 Accrued interest payable..................................................... 6,499 3,441 ------------ ------------ Total deposits........................................................... 573,411 540,128 Federal Home Loan Bank advances...................................................... 32,500 68,400 Other liabilities.................................................................... 5,665 4,906 ------------ ------------ Total liabilities.................................................................... 611,576 613,434 ------------ ------------ Commitments and contingencies Stockholders' equity: Common stock, $1.00 par value; authorized 10,000,000 shares; 5,299,201 and 5,231,317 shares issued and outstanding, respectively.......................... 5,299 5,231 Additional paid-in capital....................................................... 28,500 28,115 Retained earnings................................................................ 23,593 20,320 Unearned compensation............................................................ (1,128) Net unrealized loss on securities, net of tax benefit of $261 and $369, respectively................................................................... (464) (715) ------------ ------------ Total stockholders' equity................................................... 56,928 51,823 ------------ ------------ $ 668,504 $ 665,257 ------------ ------------ ------------ ------------
The accompanying notes are an integral part of these consolidated financial statements. 3 Consolidated Statements of Income (Unaudited)
Three Months Ended Nine Months Ended -------------------------- -------------------------- PALFED, Inc. September 30 September 30 September 30 September 30 and subsidiaries 1997 1996 1997 1996 ------------ ------------ ------------ ------------ (IN THOUSANDS, EXCEPT PER SHARE DATA) Interest income: Loans receivable..................................... $ 12,338 $ 11,055 $ 36,249 $ 32,209 Mortgage-backed securities........................... 998 1,081 3,082 3,244 Investment securities................................ 321 570 1,046 1,857 Other................................................ 88 58 205 182 ------------ ------------ ------------ ------------ Total interest income.......................... 13,745 12,764 40,582 37,492 ------------ ------------ ------------ ------------ Interest expense: Deposits............................................. 6,829 6,159 19,810 18,199 Other borrowings..................................... 512 870 1,945 3,100 ------------ ------------ ------------ ------------ Total interest expense......................... 7,341 7,029 21,755 21,299 ------------ ------------ ------------ ------------ Net interest income.................................... 6,404 5,735 18,827 16,193 Provision for estimated losses on loans................ 41 313 665 899 ------------ ------------ ------------ ------------ Net interest income after provision for estimated loan losses............................................... 6,363 5,422 18,162 15,294 ------------ ------------ ------------ ------------ Noninterest income: Checking transaction fees............................ 528 611 1,603 1,812 Financial services fees.............................. 228 209 598 664 Late charge and other fees........................... 123 77 376 353 Net trading account gains and losses................. 110 87 318 219 Gain on sales of available-for-sale securities....... 19 23 34 197 Gain on sales of loans held-for-sale................. 108 67 224 350 Real estate operations............................... (423) (288) (903) (463) Other................................................ 206 288 576 677 ------------ ------------ ------------ ------------ Total noninterest income....................... 899 1,074 2,826 3,809 ------------ ------------ ------------ ------------ Noninterest expenses: Compensation and employee benefits................... 4,043 2,449 9,504 7,429 Occupancy and equipment.............................. 784 764 2,369 2,228 Federal insurance premiums and assessments........... 163 3,657 482 4,364 Professional and outside service fees................ 316 335 1,049 1,035 Data processing...................................... 220 208 654 626 Advertising and public relations..................... 120 139 481 562 Other................................................ 146 375 513 864 ------------ ------------ ------------ ------------ Total noninterest expenses..................... 5,792 7,927 15,052 17,108 ------------ ------------ ------------ ------------ Income (loss) before provision for income taxes........ 1,470 (1,431) 5,936 1,995 Provision (benefit) for income taxes................... 529 (453) 2,188 749 ------------ ------------ ------------ ------------ Net income (loss)...................................... $ 941 $ (978) $ 3,748 $ 1,246 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Earnings (loss) per share.............................. $ 0.18 $ (0.19) $ 0.70 $ 0.24 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Dividends per share.................................... $ 0.03 $ 0.02 $ 0.09 $ 0.06 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
The accompanying notes are an integral part of these consolidated financial statements. 4 Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended September 30, PALFED, Inc. -------------------- and subsidiaries 1997 1996 --------- --------- (in thousands) Operating Activities: Cash flows from operating activities : Net income........................................................................ $ 3,748 $ 1,246 Adjustments to reconcile net income to cash provided by operations: Depreciation and amortization................................................. 520 642 Recognition of unearned compensation.......................................... 1,123 Provision for estimated losses on loans and real estate....................... 1,000 1,076 Other gains, net.............................................................. (404) (647) Proceeds from sales of loans held-for-sale.................................... 13,330 18,303 Originations of loans held-for-sale........................................... (33,150) (33,332) Proceeds from sales of trading account securities............................. 35,001 17,532 Gain on sale of available-for-sale securities................................. (34) (350) Changes in: Accrued interest receivable, net........................................ (85) 312 Accrued interest payable................................................ 3,058 5,536 Other assets............................................................ (81) 954 Other liabilities (excluding deferred income)........................... (407) 5,161 Other, net.................................................................... 274 712 --------- --------- Net cash provided by operating activities..................................... 23,893 17,145 --------- --------- Investing activities: Cash flows from investing activities: Net sales of FHLB stock......................................................... 7,405 Proceeds from sales of available-for-sale securities............................ 7,128 19,198 Principal collections on available-for-sale securities.......................... 1,345 12,641 Purchases of available-for-sale securities...................................... (7,183) (7,998) Net increase in loans receivable................................................ (40,932) (52,685) Purchases of held-to-maturity securities........................................ (6,852) Principal collections and maturities of held-to-maturity securities............. 8,176 8,005 Proceeds from sales of foreclosed real estate................................... 1,432 2,419 Purchase of premises and equipment.............................................. (583) (1,143) Other, net...................................................................... (46) 1,561 --------- --------- Net cash used by investing activities....................................... (23,258) (24,854) --------- ---------
5 Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended September 30, PALFED, Inc. -------------------- and subsidiaries 1997 1996 --------- --------- (IN THOUSANDS) Financing activities: Cash flows from financing activities : Net increase in deposit accounts.................................................. 30,225 19,077 Proceeds from FHLB advances....................................................... 61,850 84,900 Repayments of FHLB advances....................................................... (97,750) (102,700) Payment of cash dividend.......................................................... (475) (313) Other, net........................................................................ 1,576 844 --------- --------- Net cash provided (used) by financing activities.............................. (4,574) 1,808 --------- --------- Net decrease in cash and cash equivalents........................................... (3,939) (5,901) Cash and cash equivalents, beginning of period...................................... 20,407 21,325 --------- --------- Cash and cash equivalents, end of period............................................ $ 16,468 $ 15,424 --------- --------- --------- --------- Supplemental disclosures of cash flow information: Cash paid for: Interest...................................................................... $ 18,697 $ 15,763 Income taxes.................................................................. 2,147 1,217 Supplemental schedule of noncash investing and financing activities: Securitizations of mortgage loans............................................... $ 34,683 $ 17,312 Conversion of adjustable rate and construction loans receivable to 30 year fixed rate mortgage loans held-for-sale.................................. 12,695 7,918 Real estate acquired through foreclosure........................................ 1,750 4,471 Financed sales of foreclosed real estate........................................ 2,123 1,677 Issuance of common stock as compensation........................................ 36 81
The accompanying notes are an integral part of these financial statements. 6 PALFED, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. summary of Significant Accounting Policies General The accounting and reporting policies of PALFED, Inc. and Subsidiaries (the "Company") conform to generally accepted accounting principles and to general practice within the thrift industry. They reflect all adjustments which, in the opinion of management, are necessary for a fair presentation of the consolidated financial position, results of operations and cash flows for the interim periods presented. These adjustments are of a normal and recurring nature. These consolidated financial statements should be read in conjunction with the consolidated financial statements, the related notes, and the report of independent accountants included in the Company's Annual Report to Shareholders for the year ended December 31, 1996. The year end consolidated statement of financial condition data was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles. The results of operations for the three and nine months ended September 30, 1997 are not necessarily indicative of the results to be expected for a full year. Recently Issued Accounting Standards The Financial Accounting Standards Board ("FASB") has issued SFAS No. 128, "Earnings Per Share", which simplifies the present standards for computing earnings per share ("EPS"). SFAS No. 128 replaces primary EPS with basic EPS which excludes dilution and is computed by dividing net income by the weighted average number of common shares outstanding for the period. SFAS No. 128 replaces fully diluted EPS with diluted EPS which reflects the potential dilution that would occur if securities or other contracts to issue common stock were exercised. SFAS No. 128 is effective for the Company as of December 31, 1997. The following presents EPS for the three and nine months ended September 30, 1997 and 1996 if SFAS No. 128 had been in effect:
Three Months Nine Months 1997 1996 1997 1996 --------- --------- --------- --------- Basic earnings per share....................... $ 0.18 $ (0.19) $ 0.72 $ 0.24 --------- --------- --------- --------- --------- --------- --------- --------- Diluted earnings per share..................... $ 0.18 $ (0.19) $ 0.70 $ 0.24 --------- --------- --------- --------- --------- --------- --------- ---------
In February 1997, the FASB issued SFAS No. 129, "Disclosure of Information About Capital Structure", which consolidates the existing requirements to disclose certain information about an entity's capital structure and is not expected to change the Company's current capital structure disclosures. SFAS No. 129 is effective for the Company for the year ending December 31, 1997. In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income", which establishes standards for reporting and displaying comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general- 7 purpose financial statements. The purpose of reporting comprehensive income is to present a measure of all changes in equity that result from recognized transactions and other economic events of the period other than investments by owners and distributions to owners. The FASB believes that SFAS No. 130 should help investors, creditors and others in assessing a company's activities and the timing and magnitude of its future cash flows. For the Company, the primary difference between net income and comprehensive income is the change in unrealized gains and losses on securities available-for-sale. SFAS No. 130 is not expected to have a materially adverse impact on the consolidated financial position of the Company and is effective for the year ending December 31, 1998. Also in June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information", which establishes new standards for public companies to report information about operating segments in annual financial statements and also requires that those companies report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas and major customers. Management has not yet determined the impact of SFAS No. 131 on the Company's future disclosures. SFAS No. 131 is effective for the Company beginning January 1, 1998. Reclassifications Certain accounts in the 1996 consolidated financial statements have been reclassified to conform to the 1997 presentation. Included in these accounts are net reclassifications between operating and investing activities in the statements of cash flows of $2.6 million, relating to loans held-for-sale and trading securities. 2. Merger with Regions Financial Corporation On September 23, 1997, PALFED, Inc. and Regions Financial Corporation ("Regions") entered into an Agreement and Plan of Merger ("Agreement") pursuant to which PALFED will merge with and into Regions. Regions is a multi-bank holding company located in Birmingham, Alabama, with total assets of approximately $22 billion. Under the terms of the Agreement, each outstanding share of PALFED common stock will be converted into 0.70 shares of Regions common stock, subject to adjustment. The Agreement is subject to PALFED shareholder approval, appropriate regulatory approvals and other customary closing conditions. The transaction is intended to qualify as a tax-free reorganization. The transaction will be accounted for as a pooling of interests. PALFED and a subsidiary of Regions are currently finalizing the terms of mortgage loan sub-servicing agreements in anticipation of the merger between these companies. Under this agreement, Regions will service approximately $490 million in first mortgage loans which PALFED either owns or services for others. The agreement is expected to provide for the nullification of this arrangement in the event the merger is not consummated. 3. Investment and Mortgage-Backed Securities Investment and mortgage-backed securities are summarized as follows:
September 30, 1997 December 31, 1996 ---------------------- -------------------- Amortized Fair Amortized Fair Cost Value Cost Value ----------- --------- --------- --------- (in thousands) Available-for-sale Investment securities................................................ $ 12,448 $ 12,361 $ 15,964 $ 15,768 Mortgage-backed securities........................................... 10,442 10,564 8,161 8,239 ----------- --------- --------- --------- $ 22,890 $ 22,925 $ 24,125 $ 24,007 ----------- --------- --------- --------- ----------- --------- --------- --------- Held-to-maturity Investment securities................................................ $ 3,969 $ 3,969 $ 6,962 $ 6,947 Mortgage-backed securities........................................... 46,713 47,450 51,738 52,275 ----------- --------- --------- --------- $ 50,682 $ 51,419 $ 58,700 $ 59,222 ----------- --------- --------- --------- ----------- --------- --------- ---------
8 3. Loans Receivable Loans receivable are summarized as follows at the indicated dates:
September 30 December 31 1997 1996 ------------ ------------ (in thousands) Loan collateralized by real estate: Permanent residential mortgage..................................................... $ 230,685 $ 224,955 Construction....................................................................... 72,610 54,816 Second mortgage.................................................................... 55,197 56,022 Commercial......................................................................... 158,455 145,685 Loans collateralized by other property: Consumer........................................................................... 32,529 34,903 Commercial......................................................................... 16,661 16,209 Loans collateralized by savings accounts............................................. 4,780 4,725 ------------ ------------ 570,917 537,315 Less: Loans in process................................................................... (20,280) (16,263) Unamortized yield adjustments...................................................... (2,658) (1,190) Allowance for estimated losses..................................................... (7,267) (6,983) ------------ ------------ $ 540,712 $ 512,879 ------------ ------------ ------------ ------------
Changes in the allowance for estimated loan losses are summarized as follows for the quarters and nine months ended September 30:
Quarters Nine Months -------------------- -------------------- 1997 1996 1997 1996 --------- --------- --------- --------- (in thousands) Balance, beginning of period............................................... $ 7,215 $ 7,914 $ 6,983 $ 8,417 Provisions................................................................. 41 313 665 899 Charge-offs................................................................ (156) (521) (806) (1,867) Recoveries................................................................. 167 92 425 349 --------- --------- --------- --------- Balance, end of period..................................................... $ 7,267 $ 7,798 $ 7,267 $ 7,798 --------- --------- --------- --------- --------- --------- --------- ---------
At September 30, 1997, the recorded investment in loans for which impairment has been recognized in accordance with SFAS No. 114 totalled approximately $3.0 million, of which $190,000 related to loans with a corresponding valuation allowance of $70,000. The impaired loans at September 30, 1997, were measured for impairment using the fair value of the collateral as substantially all such loans were collateral dependent. For the nine months ended September 30, 1997, the average recorded investment in impaired loans was approximately $4.6 million. The interest income recognized on impaired loans during the nine months ended September 30, 1997 was $140,000. Impaired loans are summarized as follows:
September 30 december 31 1997 1996 ------------- ------------- (in thousands) Construction loans........................................ $ 155 $ 557 Commercial real estate loans.............................. 2,303 7,150 Residential mortgage...................................... 513 515 ------ ------ $ 2,971 $ 8,222 ------ ------ ------ ------
9 4. Commitments and Contingencies The Company has salary continuation and noncompete agreements with nine officers which grant these officers the right to receive three times their average annual compensation for the five years preceding a change of control of the Company and a change of duties or salary for such officers. The estimated contingent liability under these agreements is approximately $4.1 million at September 30, 1997. Upon the effective date of the merger between PALFED and Regions (as discussed in Note 2), the obligation under these agreements will be fixed and payable to these officers. Concurrent with the 1990 sale of the Woodside Plantation Country Club ("WPCC"), the Company entered into an agreement with WPCC to purchase club memberships. This obligation to purchase memberships, based on future lot sales, is subject to an annual limitation and depends upon whether full or partial memberships are purchased. The maximum liability under this contingency, assuming the annual limitation is met and partial memberships are purchased, is approximately $1.1 million. In 1993, the Company sold the remaining lots and certain other real estate at Woodside Plantation and the purchaser assumed the Company's obligations under this agreement. The Company remains contingently liable under this agreement. 5. Financial Instruments With Off-Balance-Sheet Risk The amounts of financial instruments with off-balance-sheet risk are as follows at the dates indicated:
September 30 December 31 1997 1996 ------------ ------------ (in thousands) Financial instruments whose contract amounts represent credit risk: Commitments to originate loans:............................. $ 33,242 $ 32,908 ------------ ------------ ------------ ------------ Unused lines of credit:..................................... $ 39,137 $ 35,560 ------------ ------------ ------------ ------------ Letters of credit........................................... $ 1,083 $ 1,004 ------------ ------------ ------------ ------------
10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW On September 23, 1997, PALFED, Inc. and Regions Financial Corporation ("Regions") entered into an Agreement and Plan of Merger (the "Agreement") pursuant to which PALFED will merge with and into Regions. Under the terms of the Agreement, each outstanding share of PALFED common stock will be converted into the right to receive 0.70 shares of Regions common stock, subject to adjustment. The Agreement is subject to PALFED shareholder approval, appropriate regulatory approvals and other customary closing conditions. The transaction is intended to qualify as a pooling of interests and is expected to close during the first quarter of 1998. The Company's net earnings for the three months ended September 30, 1997 were $941,000 or $0.18 per common share compared to a loss of $978,000 or $0.19 per common share in 1996. The net earnings for the nine months ended September 30, 1997 were $3.7 million or $0.70 per common share compared to $1.2 million or $0.24 per common share in 1996. Earnings for the 1997 periods were reduced by $1.1 million (before tax) due to recognition of additional compensation expense related to accelerated amortization of stock grants. Results of operations for both the three and nine month periods in 1996 were significantly affected by the special assessment of $3.3 million to recapitalize the Savings Association Insurance Fund. PALFED and a subsidiary of Regions are currently finalizing the terms of mortgage loan sub-servicing agreements in anticipation of the merger between these companies. Under this agreement, Regions will service approximately $490 million in first mortgage loans which PALFED either owns or services for others. The agreement is expected to provide for the nullification of this arrangement in the event the merger is not consummated. COMPARISON OF 1997 AND 1996 OPERATING RESULTS Net Interest Income Net interest income was $6.4 million for the quarter ended September 30, 1997, an increase of $669,000 or 11.7% compared to the quarter ended September 30, 1996. For the nine months ended September 30, 1997, net interest income increased by $2.6 million or 16.3% to $18.8 million compared to the nine months ended September 30, 1996. Several balance sheet changes contributed to the improvement. Although total assets remained virtually unchanged, the loan portfolio grew by $25.9 million and deposits grew by $33.3 million, mostly in certificates of deposit. Offsetting these increases were decreases in investments, including Federal Home Loan Bank ("FHLB") stock, cash, and FHLB advances. The net interest spread resulting from the investments and advances (which were paid off) was very small, while the loan and deposit growth produced both an increase in earning asset yield and a decline in cost of funds. As a result, the net interest spread and the net yield on average interest-earning assets improved for both the three and nine month periods. The following table presents information with respect to interest income from interest-earning assets and interest expense from interest-bearing liabilities, expressed in both dollars (in thousands) and rates, for the nine months ended September 30, 1997 and 1996. Averages are computed using month-end balances for the periods presented. Nonaccruing loans have been included in average loans receivable for purposes of calculating the average yield on loans receivable. 11
1997 1996 ----------------------- ----------------------- Average Yield/ Average Yield/ Balance Rate Balance Rate ---------- ------ ---------- ------ Assets: Interest-bearing deposits............................................... $ 5,043 5.42% $ 3,482 5.17% Loans receivable........................................................ 537,890 8.99 483,393 8.88 Mortgage-backed securities.............................................. 59,245 6.94 64,741 6.68 Total investments....................................................... 20,009 5.65 30,574 5.52 FHLB stock.............................................................. 3,658 7.25 10,884 7.20 ---------- ----- ---------- ----- Total interest-earning assets........................................... $ 625,845 8.65% $ 593,074 8.43% ---------- ----- ---------- ----- ---------- ----- ---------- ----- Liabilities: Retail savings deposits................................................. $ 33,611 2.74% $ 32,103 2.58% Retail time deposits.................................................... 402,400 5.75 372,286 5.82 Demand deposits......................................................... 121,562 1.98 104,621 1.72 FHLB advances........................................................... 46,290 5.62 68,590 6.04 ---------- ----- ---------- ----- Total interest-bearing liabilities...................................... $ 603,863 4.82% $ 577,600 4.93% ---------- ----- ---------- ----- ---------- ----- ---------- ----- Net interest spread............................................... 3.83% 3.50% ---------- ----- ---------- ----- ---------- ----- ---------- ----- Net yield......................................................... 4.01% 3.64% ---------- ----- ---------- ----- ---------- ----- ---------- -----
The following table describes the extent to which changes in interest rates and changes in volume of interest-earning assets and interest-bearing liabilities have affected Palmetto Federal's net interest income during the nine month periods indicated.
September 1997 versus September 1996 Increase (Decrease) -------------------------------------------- Rate/ Volume Rate Volume Total --------- --------- ----------- --------- (in thousands) Changes in: Interest income: Loans receivable........................................................... $ 3,615 $ 382 $ 43 $ 4,040 Mortgage-backed securities................................................. (275) 124 (11) (162) Investments................................................................ (736) (84) 32 (788) --------- --------- --- --------- Total interest income....................................................... 2,604 422 64 3,090 --------- --------- --- --------- Interest expense: Deposits................................................................... 1,736 (114) (11) 1,611 Other borrowed money....................................................... (1,008) (218) 71 (1,155) --------- --------- --- --------- Total interest expense...................................................... 728 (332) 60 456 --------- --------- --- --------- Net interest income (expense)................................................ $ 1,876 $ 754 $ 4 $ 2,634 --------- --------- --- --------- --------- --------- --- ---------
Noninterest Income Noninterest income was $899,000 for the quarter ended September 30, 1997, a decrease of $175,000 or 16.3% from the 1996 quarter. The decline was primarily attributable to increased real estate operations losses which resulted from an increase of $95,000 in provisions for estimated losses related to real estate held for development and sale. Additionally, repairs and maintenance on such properties increased by $55,000. Checking fees continued to decline primarily due to decreased nonsufficient funds charges related to a previously discontinued "no minimum balance" product line. The number of such accounts continues to decrease, but this decrease has been offset by an increase in a higher average balance checking account. The Company experienced gains of $237,000 on sales of investment and mortgage-backed securities available-for-sale and loans held-for-sale during the 1997 quarter compared to $177,000 for the 1996 quarter. For the comparable nine month periods, gains totalled $576,000 for 1997 and $766,000 for 1996. For the nine months ended September 30, 1997, noninterest income decreased by $983,000 or 25.8% to $2.8 million from the 1996 period. For the comparable nine month periods: losses from real estate operations increased by $440,000 due 12 primarily to an increase in the provision for loss on foreclosed real estate, and; checking transaction fees decreased $209,000 or 11.5% due to decreases in fee generating accounts. Noninterest Expenses Noninterest expenses were $5.8 million for the quarter ended September 30, 1997 compared to $7.9 million for the comparable 1996 quarter. The 1997 quarter included additional compensation expense of $1.1 million related to certain common stock grants. Upon the signing of the definitive merger agreement with Regions, restrictions on 88,049 shares of restricted stock lapsed. These shares were issued in February 1996 pursuant to the 1993 Restricted Stock Incentive Award Plan. The 1996 quarter included a special assessment of $3.3 million to recapitalize the SAIF which was enacted by the United States Congress on September 30, 1996. Compensation and employee benefits also increased during the 1997 quarter due to average merit salary increases of 4%, additional employees staffing new offices and additional incentive compensation. Other noninterest expenses decreased by 61% during the 1997 quarter. The 1996 quarter included an estimated loss of $145,000 on a commercial checking account and $62,000 in goodwill and core deposit intangible amortization. These remaining intangible assets were written off in December 1996. For the nine months ended September 30, 1997, noninterest expense decreased by $2.1 million from the 1996 period. The $2.1 million increase in compensation and employee benefits in 1997 was offset by the $3.3 million SAIF special assessment in 1996. LENDING ACTIVITIES During the quarter ended September 30, 1997, the Company originated $65.2 million in loans compared to $56.3 million for the quarter ended September 30, 1996. Year-to-date originations were $183.7 million in 1997 compared to $173.9 million in 1996. Loans receivable were $540.7 million at September 30, 1997, compared to $512.9 million at December 31, 1996, an increase of 5.4%. Residential mortgage loan originations were $25.0 million in the 1997 quarter compared to $20.6 million for the quarter ended September 30, 1996. Construction loan originations increased by 29.3% to $18.9 million in the 1997 quarter. Consumer loan originations increased by 34.7% to $8.9 million for the 1997 quarter. CREDIT QUALITY During the quarter ended September 30, 1997, nonperforming assets and restructured loans continued to decline. Additionally, charge-offs during the quarter were $156,000 compared to $521,000 during the 1996 quarter and recoveries were $167,000 during the 1997 quarter compared to $92,000 in 1996. Consequently, the provision for estimated losses on loans was $41,000 for the 1997 quarter compared to $313,000 for the 1996 quarter. For the comparable nine month periods, the provision for estimated loan losses decreased from $899,000 in 1996 to $665,000 in 1997 while net charge-offs decreased from $1.5 million in 1996 to $381,000 in 1997. The allowance for estimated loan losses of $7.3 million resulted in a coverage ratio of 52.4% at September 30, 1997 compared to 29.6% at September 30, 1996. Nonperforming assets (nonaccrual loans and foreclosed real estate ("REO")) and restructured loans, net of specific allowances, decreased from $17.7 million or 2.7% of total assets at December 31, 1996 to $13.6 million or 2.0% of total assets at September 30, 1997. The table below sets forth the amounts and categories of Palmetto Federal's nonperforming assets and restructured loans at the dates indicated. 13
Sept. 30 June 30 December 31 Sept. 30 1997 1997 1996 1996 --------- --------- ------------ --------- (dollars in thousands) Nonaccrual loans................................................... $ 3,412 $ 2,867 $ 3,971 $ 3,309 Foreclosed real estate............................................. 5,908 6,155 7,187 8,884 Restructured loans................................................. 4,296 5,065 6,533 10,532 --------- --------- ------------ --------- $ 13,616 $ 14,087 $ 17,691 $ 22,725 --------- --------- ------------ --------- --------- --------- ------------ --------- General loan loss allowance as a percentage of the total........... 52.4% 50.1% 36.2% 29.6% --------- --------- ------------ --------- --------- --------- ------------ --------- Total as a percentage of loans receivable, net..................... 2.5% 2.6% 3.4% 4.5% --------- --------- ------------ --------- --------- --------- ------------ --------- Total as a percentage of total assets.............................. 2.0% 2.1% 2.7% 3.4% --------- --------- ------------ --------- --------- --------- ------------ ---------
The quarterly increase in nonaccrual loans resulted primarily from lines-of-credit totalling $375,000 to a local retailer and an increased level of delinquent consumer loans. The decrease in foreclosed real estate resulted primarily from sales of $763,000 offset by new foreclosures of $472,000. New foreclosures consist primarily of single family houses, none exceeding $275,000. The Bank's total criticized assets include its nonperforming assets and restructured loans of $13.6 million as well as its potential problem loans of $6.8 million. The following table summarizes the Bank's criticized assets as of the dates indicated:
Sept. 30 June 30 December 31 Sept. 30 1997 1997 1996 1996 --------- --------- ------------ --------- (in thousands) Special mention.................................................... $ 14,627 $ 13,392 $ 13,278 $ 14,523 Substandard........................................................ 5,786 14,198 17,702 22,181 Doubtful........................................................... 364 Loss............................................................... 659 479 1,220 1,438 --------- --------- ------------ --------- $ 21,072 $ 28,069 $ 32,564 $ 38,142 --------- --------- ------------ --------- --------- --------- ------------ ---------
REAL ESTATE DEVELOPMENT ACTIVITY The purchaser of certain real estate at the Woodside Plantation project has an option to acquire parcels of the remaining undeveloped land at Woodside Plantation which option expires December 31, 1997. The Company is presently negotiating terms for this purchaser to acquire all the remaining undeveloped land. These terms may include but are not limited to a lower sales price than included in the option agreement and providing financing for the Purchaser. At this time the Company doesn't expect this sale to result in a loss to the Company. There are no assurances the purchaser will exercise its option by its expiration date. LIQUIDITY Palmetto Federal's principal sources of funds are deposits, loan repayments, proceeds from sales and principal payments of investment and mortgage-backed securities and loans, FHLB advances, other borrowings, and retained earnings. The liquidity of Palmetto Federal's operations is measured by the ratio of cash and short-term investments as defined by the Office of Thrift Supervision ("OTS") regulations to the sum of savings and borrowings payable in one year, less loans on savings. The Bank's average liquidity level for September 1997 of 5.9% was in excess of the required amount of 5.0%. REGULATORY MATTERS At September 30, 1997, 14 Palmetto Federal's regulatory capital was 6.6 % for both tangible and core capital and 10.6% for risk-based capital, exceeding both the regulatory minimum levels and the well capitalized standards under the Prompt Corrective Action regulations adopted by the OTS under the FDIC Improvement Act of 1991. The most recent notification from the OTS categorized the Bank as well capitalized. The OTS completed its regular examination of Palmetto Federal and PALFED during the third quarter. RECENT ACCOUNTING AND REPORTING CHANGES The FASB has issued SFAS No. 128, "Earnings Per Share", which simplifies the present standards for computing earnings per share ("EPS"). SFAS No. 128 replaces primary EPS with basic EPS which excludes dilution and is computed by dividing net income by the weighted average number of common shares outstanding for the period. SFAS No. 128 also replaces fully diluted EPS with diluted EPS which reflects the potential dilution that would occur if securities or other contracts to issue common stock were exercised. SFAS No. 128 is effective for the Company as of December 31, 1997. In February 1997, the FASB issued SFAS No. 129, "Disclosure of Information About Capital Structure", which consolidates the existing requirements to disclose certain information about an entity's capital structure and is not expected to change the Company's current capital structure disclosures. SFAS No. 129 is effective for the Company for the year ending December 31, 1997. In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income", which establishes standards for reporting and displaying comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general-purpose financial statements. The purpose of reporting comprehensive income is to present a measure of all changes in equity that result from recognized transactions and other economic events of the period other than investments by owners and distributions to owners. The FASB believes that SFAS No. 130 should help investors, creditors and others in assessing a company's activities and the timing and magnitude of its future cash flows. For the Company, the primary difference between net income and comprehensive income is the change in unrealized gains and losses on securities available-for-sale. SFAS No. 130 is not expected to have a materially adverse impact on the consolidated financial position of the Company and is effective for the year ending December 31, 1998. Also in June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information", which establishes new standards for public companies to report information about operating segments in annual financial statements and also requires that those companies report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas and major customers. Management has not yet determined the impact of SFAS No. 131 on the Company's future disclosures. SFAS No. 131 is effective for the Company beginning January 1, 1998. 15 PART II. Other Information Item 5. Other Information None. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit 11.1 Statement regarding computation of per share data. (b) Reports on Form 8-K. The Company filed a report on Form 8-K dated August 26, 1997, regarding changes made to the bylaws of PALFED, Inc. The Company also filed a report dated September 23, 1997, announcing that PALFED, Inc. and Regions Financial Corporation ("Regions") had entered into an Agreement and Plan of Merger ("Agreement") pursuant to which PALFED will merge with and into Regions. 16 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PALFED, Inc. (Registrant) Date: November 13, 1997 /s/ John C. Troutman ---------------------------- John C. Troutman President and Chief Executive Officer Date: November 13, 1997 /s/ Darrell R. Rains ---------------------------- Darrell R. Rains Executive Vice President and Chief Financial Officer Date: November 13, 1997 /s/ Michael B. Smith ---------------------------- Michael B. Smith Senior Vice President and Controller 17 EX-11.1 2 EX-11.1 Exhibit 11.1 PALFED, Inc. Statement Regarding Computation of Per Share Data
Three Months Nine Months Ended Ended September 30 September 30 --------------- --------------- (in thousands) 1997 Weighted average shares outstanding........................... 5,208 5,198 Stock options outstanding..................................... 337 303 Shares assumed repurchased.................................... (180) (150) ----- ----- Average common and common equivalent shares (1)............... 5,365 5,351 ----- ----- ----- -----
Three Months Nine Months Ended Ended September 30 September 30 --------------- --------------- (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 ----- ----- ----- -----
(1) Stock options outstanding less shares assumed repurchased are common stock equivalents. EX-27 3 EX-27
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED STATEMENTS OF FINANCIAL POSITION FOR PALFED, INC. AND SUBSIDIARIES AS OF SEPTEMBER 30, 1997 AND THE RELATED CONSOLIDATED DATE OF OPERATIONS FOR THE THREE MONTHS THEN ENDED. 3-MOS DEC-31-1997 JUL-01-1997 SEP-30-1997 9,855 6,613 0 0 22,925 50,682 51,419 557,306 7,267 668,504 573,411 27,500 5,665 5,000 0 0 56,928 0 668,504 12,338 1,319 88 13,745 6,829 7,341 6,404 41 237 5,792 1,470 941 0 0 941 $0.180 $0.180 4.010 3,412 0 4,296 6,797 7,215 156 167 7,267 7,267 0 7,138
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