FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________
Quarterly Report Under Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For the quarter ended SEC Commission File
September 30, 1995 Docket Number 0-15334
________________
PALFED, INC.
(Exact name of registrant as specified in its charter)
SOUTH CAROLINA 57-0821295
(State or other jurisdiction of (IRS Employer
incorporation or organization) identification number)
107 CHESTERFIELD STREET SOUTH
AIKEN, SOUTH CAROLINA 29801
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (803) 642-1400
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] NO [ ]
There were 5,101,064 shares of Common Stock outstanding on September 30, 1995.
PALFED, INC.
Quarterly Report on Form 10-Q
For The Quarter Ended SEPTEMBER 30, 1995
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
ITEM Page
----
1. Financial Statements
Consolidated Statements of Financial
Condition as of September 30, 1995
and December 31, 1994. 3
Consolidated Statements of Income
for the Three and Nine Months Ended
September 30, 1995 and 1994. 4
Consolidated Statements of Cash
Flows for the Nine Months Ended
September 30, 1995 and 1994. 5
Notes to Consolidated Financial Statements 6
2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 12
PART II - OTHER INFORMATION
ITEM
4. Submission of Matters To a Vote of
Security Holders 21
5. Other Information 21
6. (a) Exhibits 21
(b) Reports on Form 8-K 21
SIGNATURES 22
2
PALFED, Inc and Subsidiaries
Consolidated Statements of Financial Condition
(Unaudited)
September 30 and December 31 1995 1994
- ---------------------------------------------------------------------------
(in thousands, except share data)
ASSETS
Cash and due from banks $ 8,895 $ 11,277
Interest and due from banks 5,473 7,054
Investment and mortgage-backed securities:
Available-for-sale 22,306 33,020
Held-to-maturity 108,319 119,070
Loans receivable, net 456,489 447,991
Investment in real estate, net 14,403 14,720
Investment in Federal Home Loan Bank
Stock 10,884 10,884
Premises and equipment, net 5,327 5,157
Goodwill and intangible value of branch
network, net 2,725 2,932
Accrued interest, net of allowance of
$1,064 and $1,309, respectively 3,918 3,710
Other assets 4,125 6,610
-----------------------
$642,864 $662,425
=======================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest bearing accounts $ 28,858 $ 26,381
Savings and NOW accounts 96,755 109,864
Certificates of deposit 365,721 341,360
Accrued interest payable 6,880 644
-----------------------
Total deposits 498,214 478,249
-----------------------
Federal Home Loan Bank advances 88,800 135,800
Advance payments by borrowers for taxes
and insurance 1,840 622
Other liabilities 3,914 2,598
-----------------------
Total liabilities 592,768 617,269
Commitments and contingencies
Stockholders' equity:
Common stock, $1.00 par value; authorized
10,000,000 shares; issued 5,146,166 shares;
5,101,064 and 5,077,166 shares outstanding,
respectively 5,142 5,142
Additional paid-in capital 26,872 26,938
Retained earnings 19,535 16,481
Unrealized loss on debt securities, net
of income tax benefit of $644 and $1,505,
respectively (1,149) (2,925)
Treasury stock, at cost (41,102 and 65,000
shares, respectively) (304) (480)
-----------------------
Total stockholders' equity 50,096 45,156
-----------------------
$642,864 $662,425
=======================
The accompanying notes are an integral part of these
consolidated financial statements
3
PALFED, Inc. and Subsidiaries
Consolidated Statements of Income
(Unaudited)
For the Three and Nine Months Ended
September 30 1995 1994 1995 1994
- ---------------------------------------------------------------------------------
(in thousands)
Interest income:
Loans receivable $10,407 $ 9,497 $30,267 $28,090
Mortgage-backed securities 1,524 1,535 4,962 4,652
Investment securities 795 745 2,385 2,010
Other interest income 94 34 278 98
------- ------- ------- -------
Total interest income 12,820 11,811 37,892 34,850
------- ------- ------- -------
Interest expense:
Deposits 6,188 4,618 17,578 13,920
Other borrowings 1,538 1,932 5,391 5,714
------- ------- ------- -------
Total interest expense 7,726 6,550 22,969 19,634
------- ------- ------- -------
Net interest income 5,094 5,261 14,923 15,216
Provision for estimated loan losses 451 607 898 1,936
------- ------- ------- -------
Net interest income after provision
for estimated loan losses 4,643 4,654 14,025 13,280
------- ------- ------- -------
Noninterest income:
Checking transaction fees 638 757 1,972 2,081
Financial services fees 217 132 635 555
Late charge and other fees 116 90 396 289
Profit on sales of investment and
mortgage-backed securities and loans 172 44 253 138
Real estate operations (342) (601) (863) (1,800)
Other 191 283 608 1,628
------- ------- ------- -------
Total noninterest income 992 705 3,001 2,891
------- ------- ------- -------
General and administrative expenses:
Compensation and employee benefits 2,148 1,960 6,531 6,033
Occupancy and equipment 667 664 1,946 1,916
Federal insurance premiums and
assessments 355 380 1,039 1,219
Professional and outside service fees 260 324 859 1,233
Data processing 222 199 659 598
Advertising and public relations 69 80 567 359
Other 227 270 708 753
------- ------- ------- -------
Total general and administrative
expenses 3,948 3,877 12,309 12,111
------- ------- ------- -------
Income before provision for income taxes 1,687 1,482 4,717 4,060
Provision for income taxes 619 379 1,663 1,263
------- ------- ------- -------
Net income $ 1,068 $ 1,103 $ 3,054 $ 2,797
======= ======= ======= =======
Earnings per share $ 0.21 $ 0.21 $ 0.59 $ 0.54
======= ======= ======= =======
The accompanying notes are an integral part of these
consolidated financial statements
4
PALFED, Inc and Subsidiaries
Consolidated Statement of Cash Flows
(Unaudited)
For the nine months ended September 30, 1995 1994
- ---------------------------------------------------------------------------
(in thousands)
Operating Activities:
Cash flows from operating activities:
Net income $ 3,054 $ 2,797
Adjustments to reconcile net income to cash
provided by operations:
Depreciation 589 530
Amortization of goodwill and intangibles,
loan fees, deferred income, and premiums and
discounts 149 236
Provision for estimated losses on loans, real
estate and accrued interest receivable 2,125 3,802
Stock dividends on FHLB stock (135)
Profit on sales of real estate (297) (66)
Profit on sales of loans (346) (138)
Loss on sale of assets available-for-sale 93
Changes in:
Accrued interest receivable, net (1,188) (874)
Accrued interest payable 6,237 3,623
Other assets 1,570 2,904
Other liabilities (excluding deferred income) 1,436 (1,958)
Other, net 158 677
-----------------------
Net cash provided by operating activities 13,580 11,398
-----------------------
Investing activities:
Cash flows from investing activities:
Purchases of investment and mortgage-backed
securities (11,040)
Principal payments and maturities of investment
and mortgage-backed securities 10,781 13,169
Purchases of assets available-for-sale (9,754) (41,828)
Principal collections on assets available-
for-sale 3,458 5,851
Proceeds from sales of assets available-
for-sale 50,023 55,924
Loans originated (net of payments received) (41,822) (48,500)
Proceeds from sales of foreclosed real estate 2,683 6,830
Purchase of premises and equipment (749) (1,319)
Other, net (215) 0
-----------------------
Net cash provided (used) by investing
activities 14,405 (20,913)
-----------------------
Financing Activities:
Cash flows from financing activities:
Net increase (decrease) in deposit accounts 13,729 (10,516)
Proceeds from FHLB advances and other
borrowed money 35,000 124,400
Repayments of FHLB advances and other
borrowed money (82,000) (113,659)
Other, Net 1,323 1,552
-----------------------
Net cash provided (used) by financing
activities (31,948) 1,777
-----------------------
Net decrease in cash and cash equivalents (3,963) (7,738)
Cash and cash equivalents, beginning of
period 18,331 20,224
-----------------------
Cash and cash equivalents, end of period $ 14,368 $ 12,486
=======================
Interest paid, net of amounts capitalized $ 16,732 $ 16,011
=======================
Income taxes paid $ 800 $ 0
=======================
The accompanying notes are an integral part of these
consolidated financial statements
5
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 to 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, 1994. 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, 1995
are not necessarily indicative of the results to be expected for a full year.
STATEMENTS OF CASH FLOWS
Cash and cash equivalents include cash and due from banks and interest-bearing
deposits with other banks. The following table summarizes the noncash
transactions for the nine months ended September 30:
1995 1994
---- ----
(in millions)
Securitizations of mortgage loans $19.9 $31.8
Loan foreclosures 7.5 2.8
Financed sales of real estate 5.4 2.3
Transfers of investment and mortgage-backed
securities from available-for-sale to
held-to-maturity 91.5
LOANS RECEIVABLE
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
114, "Accounting By Creditors for Impairment of a Loan", as amended by SFAS No.
118, "Accounting By Creditors For Impairment of a Loan - Income Recognition and
Disclosures, an Amendment of SFAS No. 114", on January 1, 1995. Under the new
standard, a loan is considered impaired, based on current information and
events, if it is probable that the Company will be unable to collect the
scheduled payments of principal and interest when due according to the
contractual terms of the loan agreement.
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company uses several factors in determining if a loan is impaired under SFAS
No. 114. The quarterly asset classification procedures include a thorough
review of significant loans and lending relationships and include the
accumulation of related data. This data includes loan payment status, borrowers'
financial data and borrowers' operating factors such as cash flows, operating
income or loss, etc.
The measurement of impaired loans is generally based on the present value of
expected future cash flows discounted at the historical effective interest rate,
except that collateral dependent loans are measured for impairment at the fair
value of the collateral. The adoption of SFAS No. 114 resulted in no additional
provision for credit losses at January 1, 1995.
Also under this standard, loans which are considered to be in-substance
foreclosed continue to be measured at the fair value of the collateral, however,
these loans are classified as loans receivable rather than as foreclosed real
estate, as was the case previously. Therefore, in-substance foreclosures of
$3.2 million at December 31, 1994 have been reclassified from investment in real
estate to loans receivable.
Loans, including impaired loans, are generally classified as nonaccrual if they
are past due in excess of 90 days. Loans that are on a current payment status
or less than 90 days past due may also be classified as nonaccrual if repayment
in full of interest and principal is in doubt.
RECENTLY ISSUED ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board ("FASB") issued SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets To Be Disposed Of". SFAS No. 121 requires that long-lived assets and
certain identifiable intangibles to be held and used by the Company be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. If the future undiscounted
cash flows expected to result from the use of the asset and its eventual
disposition are less than the carrying amount of the asset, an impairment loss
is recognized. Otherwise, an impairment loss is not recognized. This statement
also requires that long-lived assets and certain identifiable intangibles to be
disposed of be reported at the lower of carrying amount or fair value less cost
to sell, except for assets that are covered by accounting standards related to
business segments and unusual and infrequently occurring events. SFAS No. 121
is effective for the Company for the year ending December 31, 1996. Management
is reviewing SFAS No. 121 to determine its effect on the financial condition and
results of operations of the Company.
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In May 1995, the FASB issued SFAS No. 122, "Accounting for Mortgage Servicing
Rights". SFAS No. 122 requires that a mortgage banking enterprise recognize as
assets rights to service mortgage loans for others, however those servicing
rights are acquired. A mortgage banking enterprise that acquires mortgage
servicing rights through either the purchase or origination of mortgage loans
and sells or securitizes those loans with servicing rights retained should
allocate the total cost of the mortgage loans to the loans and to the mortgage
servicing rights based upon their relative fair values. This statement requires
the capitalized mortgage servicing rights be evaluated for impairment based on
the fair value of those rights by stratifying the rights based on predominant
risk characteristics of the underlying loans. SFAS No. 122 is effective for the
Company for the year ending December 31, 1996, although earlier adoption is
encouraged. Management is reviewing SFAS No. 122 to determine its effect on the
financial condition and results of operations of the Company.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation". SFAS No. 123 establishes accounting and reporting standards for
stock-based employee compensation plans including stock purchase, stock option,
restricted stock and stock appreciation right plans. SFAS No. 123 defines a
fair value based method of accounting for an employee stock option or similar
equity instrument and encourages all entities to adopt that method of
accounting. However, it also allows an entity to continue to measure
compensation cost using the intrinsic value based method of accounting
prescribed by Accounting Principles Board opinion No. 25, "Accounting for Stock
Issued To Employees". Entities electing to remain with the accounting in
Opinion 25 must make pro forma disclosures of net income and earnings per share
as if the fair value method of accounting defined in SFAS No. 123 had been
applied. SFAS No. 123 is generally effective for the Company for the year
ending December 31, 1996, although earlier adoption is permitted. Management is
reviewing SFAS No. 122 to determine the effects of the two methods on the
financial condition and results of operations of the Company.
In November 1995, the FASB will issue a Special Report entitled, "A Guide to
Implementation of Statement 115, 'Accounting For Certain Investments in Debt and
Equity Securities'". The FASB added certain transition provisions to the
Special Report, including the provision allowing all entities a one-time
opportunity to reconsider their ability and intent to hold securities to
maturity and be allowed to transfer securities from held-to-maturity to
available-for-sale without "tainting" their remaining held-to-maturity
securities. Entities would be allowed to make transfers from the date of
issuance of the Special Report (mid-November 1995) to December 31, 1995.
Management is presently analyzing its portfolio in anticipation of transferring
certain held-to-maturity securities to available-for-sale by December 31, 1995.
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RECLASSIFICATIONS
Certain amounts in the 1994 consolidated financial statements have been
reclassified to conform to the 1995 presentation.
2. EARNINGS PER COMMON SHARE
The following tables illustrate the calculation of earnings per share for
the three and nine months ended September 30:
EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE:
Quarters Ended Nine Months Ended
September 30, September 30,
-------------- -----------------
1995 1994 1995 1994
---- ---- ---- ----
Income before provision for
income taxes ...................... $ 0.33 $ 0.32 $ 0.91 $ 0.82
Provision for income taxes .......... 0.12 0.11 0.32 0.28
------ ------ ------ ------
Earnings per share .................. $ 0.21 $ 0.21 $ 0.59 $ 0.54
====== ====== ====== ======
CALCULATION OF COMMON AND COMMON EQUIVALENT SHARES:
Quarters Ended Nine Months Ended
September 30, September 30,
-------------- -----------------
(in thousands)
1995
- -----
Weighted average shares outstanding......... 5,101 5,094
Stock options outstanding................... 184 184
Shares assumed repurchased.................. 107 77 124 60
--- ----- --- -----
Average common and common equivalent shares. 5,178 5,154
===== =====
1994
- -----
Weighted average shares outstanding......... 5,142 5,141
Stock options outstanding................... 136 136
Shares assumed repurchased.................. 89 47 104 32
--- ----- --- -----
Average common and common equivalent shares. 5,189 5,173
===== =====
3. INVESTMENT AND MORTGAGE-BACKED SECURITIES
Investment and mortgage-backed securities are summarized as follows:
September 30, 1995 December 31, 1994
------------------ -----------------
Available-for-sale
----------------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- ----- --------- -----
(in thousands)
Investment securities $ 4,404 $ 4,417 $ 6,986 $ 6,709
Mortgage-backed securities 17,785 17,889 28,292 26,311
------- ------- ------- -------
$22,189 $22,306 $35,278 $33,020
======= ======= ======= =======
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Held-to-maturity
---------------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- ----- --------- -----
(in thousands)
Investment securities $ 37,014 $ 36,375 $ 39,108 $ 36,073
Mortgage-backed securities 73,163 71,954 82,134 75,598
Unrealized loss on securities
transferred from available-
for-sale (1,858) (2,172)
-------- -------- -------- --------
$108,319 $108,329 $119,070 $111,671
======== ======== ======== ========
4. ACTIVITY IN THE ALLOWANCE FOR ESTIMATED LOAN LOSSES
Changes in the allowance for estimated loan losses are summarized as follows for
the quarters and nine months ended September 30:
Quarters Nine months
1995 1994 1995 1994
----------------- -----------------
(in thousands)
Balance, beginning of period $ 8,077 $ 9,358 $ 8,212 $ 9,884
Provisions 451 607 898 1,936
Charge-offs (432) (1,727) (1,255) (3,909)
Recoveries 124 89 496 416
Reclassifications 131
------- ------- ------- -------
Balance, end of period $ 8,351 $ 8,327 $ 8,351 $ 8,327
======= ======= ======= =======
At September 30, 1995, the recorded investment in loans for which impairment has
been recognized in accordance with SFAS No. 114 totalled approximately $10.8
million, of which $6.2 million related to loans with a corresponding valuation
allowance of $1.1 million. The impaired loans at September 30, 1995, were
measured for impairment using the fair value of the collateral as substantially
all of these loans were collateral dependent. For the nine months ended
September 30, 1995, the average recorded investment in impaired loans was
approximately $11.1 million. The interest income recognized on impaired loans
during the nine months ended September 30, 1995 was $435,000. Impaired loans
are summarized as follows at September 30:
1995
----
(in thousands)
Construction loans $ 535
Land loans 3,147
Residential mortgage loans 230
Commercial real estate loans 6,875
-------
$10,787
=======
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. COMMITMENTS AND CONTINGENCIES
At June 30, 1995, the purchaser of the lots at the Woodside Plantation project
had defaulted on 2 scheduled payments under the membership agreement with
Woodside Plantation Country Club. See "Nonperforming Assets and Restructured
Loans".
6. 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
1995 1994
------------ -----------
(in thousands)
Financial instruments whose contract
amounts represent credit risk:
Commitments to originate loans $ 22,741 $ 13,690
======== ========
Unused lines of credit $ 31,520 $ 31,522
======== ========
Standby letters of credit $ 653 $ 816
======== ========
11
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 September 30, 1995 were
$1.1 million or $0.21 per common share, unchanged from the 1994 comparable third
quarter. The net earnings for the nine months ended September 30, 1995 were
$3.1 million or $0.59 per common share compared to $2.8 million or $0.54 per
common share for the comparable period in 1994. Quarterly income before
provision for income taxes increased by $205,000 or 13.8% primarily as a result
of a 25.7% decrease in the provision for estimated loan losses and a 40.7%
increase in noninterest income. However, this increase was offset by an
increase of $240,000 or 63.3% in provision for income taxes. The 1994 quarterly
income tax provision included state income tax refunds of approximately
$178,000, thereby lowering the effective tax rate to 25.6%. The increase in
year-to-date earnings resulted primarily from a decrease of $1.0 million or
53.6% in the provision for estimated losses on loans and a decrease of $937,000
or 52.1% in losses from real estate operations, offset by a decrease of $1.0
million or 62.3% in other noninterest income and an increase of $400,000 or
31.7% in provision for income taxes.
In October 1995, the Secretary of Energy announced the Savannah River Site
("SRS") as the "preferred location" for a new site for tritium production.
While this is positive news for the local economy, many details are still
unresolved, such as the decision to use existing reactor technology or the new
linear accelerator technology. Additionally, no construction is scheduled to
begin for three years, therefore, additional layoffs at SRS are possible, and
will depend on Congressional appropriation of environmental clean up funds at
SRS.
In September 1995, management and the owners of the lots and outparcels at
Woodside Plantation completed the restructuring of the debt collateralized by
that property. See NONPERFORMING ASSETS AND RESTRUCTURED LOANS.
COMPARISON OF 1995 AND 1994 OPERATING RESULTS
NET INTEREST INCOME
During the third quarter of 1995, the net interest margin continued to contract
from the 1994 level. Net interest income was $5.1 million for the quarter ended
September 30, 1995, a decrease of $167,000 or 3.2% compared to the quarter ended
September 30, 1994. Total interest income increased $1.0 million or 8.5% while
total interest expense increased $1.2 million or 18.0%. The net interest margin
was 3.22% for the third quarter of 1995 compared to 3.40% for the 1994 quarter.
The costs of liabilities increased faster than the increase in yield on assets,
however, this effect was partially offset by a decline of $43.5 million or 31.9%
in average
12
Federal Home Loan Bank advances. For the nine months ended September
30, 1995, net interest income decreased by $293,000 or 1.9% to $14.9 million
compared to the nine months ended September 30, 1994. Total interest income
increased $3.0 million or 8.7%, while total interest expense increased $3.3
million or 17.0% from the 1994 period. The net interest margin was 3.11% during
the nine months of 1995 compared to 3.29% during the nine months in 1994.
PROVISION FOR ESTIMATED LOSSES ON LOANS
Due to reductions in nonperforming and criticized assets, the 1995 provisions
and charge-offs continue to be less than the levels experienced in prior years.
The provision for estimated losses on loans was $451,000 for the quarter ended
September 30, 1995, compared to $607,000 for the 1994 quarter. Net charge-offs
for the 1995 quarter were $308,000 or 0.07% of average loans receivable compared
to $1.6 million or 0.36% of average loans receivable for the 1994 quarter. For
the comparable nine month periods, the provision for estimated loan losses
decreased from $1.9 million in 1994 to $898,000 in 1995 while net charge-offs
decreased from $3.5 million or 0.78% of average loans receivable in 1994 to
$759,000 or 0.17% of average loans receivable in 1995. The resulting allowance
for estimated losses on loans at September 30, 1995 and 1994 was $8.4 million
and $8.3 million, respectively. While management uses its best judgment in
establishing the allowance for loan losses, there is no assurance that future
provisions and charge-offs will not return to the higher levels seen in prior
years. SEE NONPERFORMING ASSETS AND RESTRUCTURED LOANS.
NONINTEREST INCOME
Noninterest income was $992,000 for the quarter ended September 30, 1995, an
increase of $287,000 or 40.7% over the 1994 quarter. Improvements in real estate
operations, profits on sales of securities and loans and financial services fees
exceeded declines in checking transaction fees and other noninterest income.
Real estate operations losses decreased $259,000 during the comparable quarters
primarily as a result of: an increase of $122,000 in net profits on foreclosed
real estate; a decrease of $103,000 in expenses associated with real estate
acquired for development and sale; and a decrease of $70,000 in expenses
associated with the maintenance and sale of foreclosed real estate. The Company
experienced profits of $172,000 on sales of investment and mortgage-backed
securities and loans during the 1995 quarter compared to $44,000 for the 1994
quarter. Financial services fees increased by $85,000 to $217,000 in the 1995
quarter due to increased sales of tax deferred annuities and other financial
products.
These improvements were partially offset by declines in other components of
noninterest income. Checking transaction fees decreased by $119,000 or 15.7% to
$638,000 for the 1995 quarter. The decrease was caused in part by a decrease in
certain low
13
balance checking accounts which generated fee income in 1994. Other
noninterest income decreased by $92,000 or 32.5% to $191,000 in 1995. The
decline was caused by the receipt in 1994 of $46,000 in interest on federal
income tax refunds and by a decrease of $38,000 in insurance commissions on
consumer life policies.
For the nine months ended September 30, 1995, noninterest income increased by
$110,000 or 3.8% to $3.0 million from the 1994 period. For the comparable nine
month periods, financial services fees increased by $80,000 or 14.4% and real
estate operations improved by $937,000 or 52.1%. However, other noninterest
income decreased by $1.0 million or 62.7% from 1994 to 1995. The 1994 amount
included the receipt of $767,000 in interest on federal income tax refunds.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses were $3.9 million for each of the quarters
ended September 30, 1995 and 1994. For the nine months ended September 30,
1995, general and administrative expenses increased $198,000 or 1.6% to $12.3
million. Compensation and employee benefits expense increased by $188,000 or
9.6% and $498,000 or 8.3% during the three and nine month periods, respectively.
The primary components of compensation and employee benefits are comprised as
follows:
Three Months Ended Nine Months Ended
Sept. 30 Sept. 30 Sept. 30 Sept. 30
1995 1994 1995 1994
-------- -------- -------- --------
(in thousands)
Salaries and commissions $ 1,967 $ 1,836 $ 5,791 $ 5,625
Incentive programs 127 74 339 280
Medical and retirement 170 214 620 683
Payroll and other taxes 132 126 466 445
Other expenses 25 24 77 67
------- ------ ------- ------
2,421 2,274 7,293 7,100
Capitalized costs of loan
originations (273) (314) (762) (1,067)
------- ----- ------ ------
$ 2,148 $ 1,960 $ 6,531 $ 6,033
====== ======= ======= =======
Salaries and benefits increased 6.5% during the quarter ended September 30,
1995, primarily due to an increase of 7.1% in salaries and commissions and an
increase of 71.6% in incentive programs. Expenses associated with incentive
programs increased due to higher earnings in 1995. Medical and retirement costs
declined 20.6% during the 1995 quarter resulting from decreased pension expense
caused by discontinuing life insurance benefits within the pension plan and
changes in actuarial assumptions. The decline of 13.1% in capitalized loan
costs resulted from decreased loan originations in the comparable quarters,
continuing the 1995 trend.
During the quarter ended September 30, 1995, professional and outside service
fees decreased by $64,000 or 19.8% to $260,000 in 1995. The decrease is
primarily attributable to a decrease of
14
$49,000 or 36.0% in legal costs, especially those costs incurred in
connection with bankruptcies and foreclosures. Other general and administrative
expenses decreased by $43,000 or 15.9% due to decreases in insurance costs,
teller shortages, consumer loan recovery expenses and appraisal expenses, offset
by an increase in the amortization of goodwill and other intangibles.
During the comparable nine month periods, professional and outside service fees
declined $374,000 or 30.03% due to decreased legal and consulting expenses, and
federal deposit insurance premiums declined by $180,000 or 14.08% due to a
reduction in the risk based premium from 31 cents to 26 cents per $100 of
deposits. Advertising and public relations increased by $180,000 to $567,000
during the 1995 period due to the new television, print and billboard
advertising in connection with the new marketing campaign to position Palmetto
Federal as "The Bank of Choice" in South Carolina.
LENDING ACTIVITIES
During the quarter ended September 30, 1995, the Company originated $43.3
million in loans compared to $37.4 million during the 1994 quarter. The 1995
originations included $21.9 million in residential mortgage, $8.1 million in
construction and $13.3 million in consumer and commercial loans compared to
$15.1 million, $6.1 million and $16.2 million, respectively, for the 1994 third
quarter. The increase of 15.7% in total originations reverses the decline in
originations experienced during the earlier months of 1995, however, total
originations in 1995 of $116.1 million continues to lag behind the 1994 figure
of $186.4 million.
ASSET/LIABILITY MANAGEMENT
Interest-earning assets were $604.5 million at September 30, 1995, which
represented a decline of 0.7% from June 30, 1995, and a decline of 1.7% from
December 31, 1994. Interest-bearing liabilities were $587.0 million at
September 30, 1995, which represented a decline of 1.9% from June 30, 1995 and a
decline of 4.4% from December 31, 1994. During the second quarter, management
continued its strategy of repaying maturing Federal Home Loan Bank Advances,
primarily short term variable rate advances, through the use of funds provided
by sales of loans and mortgage-backed securities. The controlled shrinkage in
interest earning assets and liabilities has decreased the Bank's interest rate
risk profile as the sensitivity measure has dropped from negative 1.89% at
December 31, 1994 to negative 1.38% at June 30, 1995 (the latest date for which
information is available). For the nine months ended September 30, 1995, the
ratio of average interest-earning assets to average interest-bearing liabilities
was 1.022 compared to 1.007 for the 1994 period.
The following table describes the extent to which changes in interest rates and
changes in volume of interest-earning assets and
15
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).
For The Nine Months Ended
Sept. 1995 vs. Sept. 1994
Increase (Decrease)
--------------------------------------
Rate/
Volume Rate Volume Total
------ ---- ------ -----
(in thousands)
Changes in:
Interest income:
Loans receivable............ $ 394 $ 1,757 $ 26 $ 2,177
Mortgage-backed securities.. (371) 739 (58) 310
Investments and other....... 250 273 32 555
------- ------- ----- --------
Total interest income........ 273 2,769 0 3,042
------- ------- ----- --------
Interest expense:
Deposits.................... 672 2,846 140 3,658
FHLB advances and other
borrowed money............ (1,176) 1,074 (221) (323)
------- ------- ----- --------
Total interest expense....... (504) 3,920 (81) 3,335
------- ------- ----- --------
Net interest income (expense) $ 777 $(1,151) $ 81 $ (293)
======= ======= ===== ========
The increase in total interest income was caused primarily by an increase in the
average yield on average interest-earning assets from 7.59% in 1994 to 8.20% in
1995. Additionally, average interest-earning assets increased from $611.9
million in 1994 to $616.1 million in 1995. Total interest expense increased
due to a significant increase in the average cost of average interest-bearing
liabilities from 4.31% in 1994 to 5.09% in 1995 despite a decline in average
interest-bearing liabilities from $607.8 million in 1994 to $602.8 million in
1995. The 1994 averages and yields have been recalculated by reclassifying in-
substance foreclosed loans from real estate to loans consistent with the 1995
classification.
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.
16
Interest Interest
Income/ Yield/ Income/ Yield/
1995 Expense Rate 1994 Expense Rate
---- -------- ------ ---- -------- ------
Average interest-earning assets:
Interest bearing deposits $ 6,534 $ 278 5.68% $ 4,158 $ 98 3.14%
Loans receivable 455,519 30,267 8.86 449,690 28,090 8.44
Mortgage-backed securities 99,714 4,962 6.63 108,336 4,652 5.73
Total investments (taxable) 43,422 1,794 5.51 38,864 1,531 5.25
FHLB stock 10,884 591 7.23 10,870 479 5.87
-------- ------- ---- -------- ------- ----
Total 616,073 37,892 8.20% 611,918 34,850 7.59%
-------- ------- ---- -------- ------- ----
Average interest-bearing liabilities:
Retail savings deposits $ 31,039 $ 629 2.71% $ 31,234 $ 616 2.63%
Brokered time deposits 2,673 178 8.87
Retail time deposits 364,781 15,668 5.74 327,480 11,754 4.79
Demand deposits 98,785 1,281 1.73 110,427 1,372 1.66
FHLB Advances 108,235 5,391 6.66 135,990 5,714 5.60
Other borrowed money 56 0 0
-------- ------- ---- -------- ------- ----
Total 602,840 22,969 5.09% 607,860 19,634 4.31%
-------- ------- ---- -------- ------- ----
Net interest income $14,923 $15,216
======= =======
Interest rate spread 3.11% 3.28%
==== ====
Net yield 3.23% 3.32%
==== ====
In November 1995, the FASB will issue a Special Report entitled, "A Guide to
Implementation of Statement 115, 'Accounting For Certain Investments in Debt and
Equity Securities'". The FASB added certain transition provisions to the
Special Report, including the provision allowing all entities a one-time
opportunity to reconsider their ability and intent to hold securities to
maturity and be allowed to transfer securities from held-to-maturity to
available-for-sale without "tainting" their remaining held-to-maturity
securities. Entities would be allowed to make transfers from the date of
issuance of the Special Report (mid-November 1995) to December 31, 1995.
Management is presently analyzing its portfolio in anticipation of transferring
certain held-to-maturity securities to available-for-sale by December 31, 1995.
NONPERFORMING ASSETS AND RESTRUCTURED LOANS
Nonperforming assets (nonaccrual loans and foreclosed real estate ("REO")) and
restructured loans, net of specific allowances, decreased from $35.9 million or
5.4% of total assets at December 31, 1994 to $29.1 million or 4.5% of total
assets at September 30, 1995. The decrease is primarily attributable to a
decrease in restructured loans due to sustained performance under the
restructured terms. The table below sets forth the amounts and categories of
Palmetto Federal's nonperforming assets and restructured loans at the dates
indicated.
17
Sept. 30 June 30 Dec. 31 Sept. 30
1995 1995 1994 1994
-------- -------- -------- --------
(dollars in thousands)
Nonaccrual loans $ 8,399 $ 9,021 $12,466 $11,708
Foreclosed real estate 7,937 8,812 8,269 9,941
Restructured loans 13,967 16,103 16,412 16,911
------- ------- ------- -------
30,303 33,936 37,147 38,560
Less specific valuation
allowances (1,219) (897) (1,288) (1,166)
------- ------- ------- -------
$29,084 $33,039 $35,859 $37,394
======= ======= ======= =======
General loan loss allowance
as a percentage of the total 24.5% 21.1% 19.3% 19.1%
===== ===== ===== =====
Total as a percentage of loans
receivable, net 6.4% 7.2% 8.1% 8.4%
==== ==== ==== ====
Total as a percentage of total assets 4.5% 5.1% 5.4% 5.7%
==== ==== ==== ====
Changes in the components of nonperforming assets and restructured loans during
the three months ended September 30, 1995 were as follows:
Nonaccrual REO Restructured Total
Loans Loans
---------- --- ------------ -----
(in thousands)
June 30, 1995 $ 9,021 $ 8,812 $ 16,103 $33,936
Performing loans which
became nonperforming 1,866 982 2,559 5,407
Upgrades due to performance (2,048) (4,344) (6,392)
Sales (2,241) (2,241)
Net principal collections (206) (29) (235)
Charge-offs and write downs (172) (172)
Restructured loans which became
nonaccrual 468 (468)
Nonaccrual loans which became
restructured (146) 146
Nonaccrual loans which became REO (556) 556
-------- -------- -------- -------
September 30, 1995 $ 8,399 $ 7,937 $ 13,967 $30,303
======== ======== ======== =======
The $1.9 million of new nonaccrual loans is comprised of one loan of $466,000
and several other loans, none of which individually exceed $162,000. The
$466,000 loan is collateralized by commercial real estate, a personal residence,
a certificate of deposit and certain equipment.
The $2.2 million of REO sold consist of fifteen properties, the largest of which
is a hunting preserve of approximately 1,800 acres with a book value of $1.2
million, and a parcel of 350 acres adjacent to a subdivision in south Aiken
County with a book value of $0.5 million.
The $4.3 million of upgraded restructured loans consists primarily of one loan
of $3.6 million collateralized by an apartment complex in Charleston, South
Carolina. The restructuring occurred in 1993 and the loan has performed under
the new terms since that time.
The $2.6 million in new restructured loans consists primarily of loans to
Woodside Development Limited Partnership (the "Purchaser") with a principal
balance of $2.3 million, which financed the
18
December 1993 sale of the remaining developed lots and seven outparcels at the
Woodside Development project, along with the development and sales offices
at Woodside Plantation. The restructuring included the following terms: (1) the
Company received 35 lots in return for a $492,000 reduction of the debt; (2) the
Company agreed to pay up to $330,000 toward joint marketing efforts over three
years related to the lots it owns; (3) the Company agreed to make the third and
fourth quarter 1995 payments under the membership agreement to Woodside
Plantation Country Club ("WPCC") in the amount of $184,500; (4) agreed to grant
a two year extension until December 31, 1997 of the Purchaser's option to
purchase the remaining undeveloped acreage and; (5) the Purchaser agreed to
bring the membership obligation current by payment of $189,000. Management has
accrued the marketing expenses related to the restructuring and the liability of
$184,500 related to memberships.
The Purchaser's principal source of repayment of the restructured debt is
homesite sales at the Woodside Plantation project which to date have not been
sufficient to service all the Purchaser's obligations. The terms of the
restructuring are intended to improve the cash flow of the project. However,
there are no assurances that home site sales will be sufficient to service the
restructured debt. The Company remains contingently liable to WPCC for any
unpaid amounts due under the membership agreement. See Note 11 to the Company's
Consolidated Financial Statements for the year ended December 31, 1994.
The $1.0 million of performing loans which became REO consists of six loans,
the largest of which is the Woodside Development Limited Partnership loan
discussed above.
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 $10.4 million at
September 30, 1995.
The Bank's total criticized assets include its nonperforming assets and
restructured loans of $29.1 million as well as its potential problem loans of
$10.4 million. The following table summarizes the Bank's criticized assets as
of the dates indicated:
Sept. 30 June 30 Dec. 31 Sept. 30
1995 1995 1994 1994
-------- ------- -------- --------
(in thousands)
Special mention $ 8,194 $ 3,664 $11,050 $ 6,173
Substandard 29,903 31,881 30,138 33,620
Doubtful 15 0 0 0
Loss 1,366 1,243 1,822 3,160
------- ------- ------- -------
$39,478 $36,788 $43,010 $42,953
======= ======= ======= =======
19
LIQUIDITY
Palmetto Federal's principal sources of funds are deposits, loan repayments,
proceeds from sales and principal payments of invest- ment and mortgage-backed
securities and loans, FHLB advances, other borrowings, and retained earnings.
The liquidity of Palmetto Federal's operations is measured by the ratio of cash
and short-term investments as defined by the 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 1995 was 7.8% which was in excess of the
required amount of 5.0%.
REGULATORY MATTERS
The Office of Thrift Supervision ("OTS") began its regular examination of
PALFED, Inc. and the Bank in July 1995. Management received the confidential
Report of Examination during the quarter ending September 30, 1995.
The OTS regulatory capital regulations specify three capital standards for
thrifts: a core capital requirement of 3.0%; a tangible capital requirement of
1.5%; and a risk-based capital requirement of 8.0%. Palmetto Federal's
regulatory capital as of September 30, 1995, was 6.6% tangible capital, 6.6%
core capital, and 11.3% risk-based capital, and therefore the Bank meets the
well-capitalized standard under the FDIC prompt corrective action guidelines.
Because of uncertainties regarding the insurance fund recapitalization and to
help maintain well-capitalized status PALFED, Inc. made a capital contribution
of $1.5 million to Palmetto Federal during the quarter ended September 30, 1995.
Under current law, banks and thrifts pay FDIC insurance premiums of at least 23
cents per $100 of deposits until the Bank Insurance Fund ("BIF") and the Savings
Association Insurance Fund ("SAIF") attain a required 1.25% reserve level. On
August 8, 1995, the FDIC reduced deposit insurance premiums paid by most banks
but kept existing assessment rates intact for savings associations, thereby
placing thrifts at a competitive disadvantage. Several alter-natives are being
discussed to both alleviate this disparity and still rapidly build the SAIF
reserve to 1.25%. The Administration has proposed a plan to recapitalize the
SAIF by January 1, 1996, under which thrifts will pay a one-time assessment of
85 to 90 cents per $100 of deposits. Based on insurable deposits of $500.0
million, this proposed assessment would cost the Company between $4.25 million
and $4.5 million. However, management expects this assessment to result in
decreased deposit insurance premiums in the future. Management presently
anticipates the one-time assessment will not cause the Bank to fall below the
well capitalized regulatory capital standard.
20
Part II. Other Information
Item 4. Submission of Matters To a Vote of Security Holders
None.
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 is included
in Item 1 and incorporated herein by reference.
Exhibit 27 Financial Data Schedule.
(b) Reports on Form 8-K.
The Company did not file any reports on Form 8-K during the three months
ended September 30, 1995.
21
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 10, 1995 /S/ JOHN C. TROUTMAN
----------------------- -----------------------------------------
John C. Troutman
President and Chief
Executive Officer
Date: November 10, 1995 /S/ DARRELL R. RAINS
---------------------- -----------------------------------------
Darrell R. Rains
Executive Vice President
and Chief Financial Officer
Date: November 10, 1995 /S/ MICHAEL B. SMITH
--------------------- -----------------------------------------
Michael B. Smith
Senior Vice President
and Controller