SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 2054
---------------------------------
FORM 10-K
[x] Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934 [Fee Required]
[_] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934 [No Fee Required]
For the fiscal year ended SEC Commission File
December 31, 1995 Number 0-15334
PALFED, Inc.
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(Exact name of registrant as specified in its charter)
South Carolina 57-0821295
------------------------------- ----------------
(State or other jurisdiction of (I.R.S. 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
---------------------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $1.00 Par Value
-----------------------------
(Title of Class)
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.....
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ x ]
The aggregate market value of the registrant's outstanding Common Stock held by
non-affiliates of the registrant on March 15, 1996 was $64,262,113. There were
5,222,142 shares of Common Stock outstanding on March 15, 1996.
DOCUMENTS INCORPORATED BY REFERENCE
1. Annual Report to Shareholders for the year ended December 31, 1995
(Parts I, II and IV)
2. Proxy Statement for the 1996 Annual Meeting of Shareholders (Part
III).
Page 1 of ____ sequentially numbered pages
The Index to Exhibits is on page 42.
PALFED, INC.
AND SUBSIDIARIES
TABLE OF CONTENTS
Page
No.
PART I
Item 1. Business............................................... 1
Item 2. Properties............................................. 32
Item 3. Legal Proceedings...................................... 32
Item 4. Submission of Matters to a Vote of Security Holders.... 32
PART II
Item 5. Market for Registrant's Common Equity and Related
Shareholder Matters.................................... 35
Item 6. Selected Financial Data................................ 35
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 35
Item 8. Financial Statements and Supplementary Data............ 36
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.................... 36
PART III
Item 10. Directors and Executive Officers of the Registrant..... 37
Item 11. Executive Compensation................................. 37
Item 12. Security Ownership of Certain Beneficial Owners and
Management............................................. 37
Item 13. Certain Relationships and Related Transactions......... 37
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K............................................... 38
SIGNATURES
(i)
PART I
ITEM 1. BUSINESS.
PALFED, Inc. ("PALFED", together with its subsidiaries, the "Company"),
is a South Carolina corporation that was incorporated on March 7, 1986 to own
all the outstanding stock of Palmetto Federal Savings Bank of South Carolina
("Palmetto Federal" or the "Bank"). PALFED acquired all of the stock of
Palmetto Federal on January 27, 1987.
As a savings and loan holding company, the primary business of PALFED is
to manage the business of Palmetto Federal and its other subsidiaries and
affiliates. Palmetto Federal is a federally-chartered stock savings bank which
was chartered in 1951 and converted from a federal mutual savings and loan
association to a federal stock savings bank in 1985. PALFED Investment
Services, Inc. ("PALFED Investment"), a wholly-owned subsidiary of PALFED,
offers retail securities brokerage services and consumer insurance products. At
December 31, 1995, the Company had total assets of approximately $646 million.
At December 31, 1995, PALFED and its subsidiaries had approximately 246 full-
time employees and 50 part-time employees.
BANKING AND BANK-RELATED SERVICES
GENERAL
Palmetto Federal primarily engages in attracting deposits from the
general public and, using these funds, loan repayments, other borrowings, and
proceeds from the sale of securitized mortgage loans, makes loans for the
purchase, financing or improvement of real estate. Palmetto Federal also
engages in consumer lending and other fee generating financial services.
Palmetto Federal operates 19 branch offices, all of which are located in south
central and southern South Carolina. The Bank also operates seven mortgage
lending offices. The Bank's deposits are insured up to applicable limits by the
Savings Association Insurance Fund ("SAIF") which is supervised by the Federal
Deposit Insurance Corporation ("FDIC"). The operations of the Company and the
Bank are subject to regulation by the Office of Thrift Supervision ("OTS"), the
FDIC and the Federal Reserve Board ("FRB"). Palmetto Federal is a member of the
Federal Home Loan Bank System ("FHLBS").
LENDING AND INVESTMENT ACTIVITIES
GENERAL The principal lending activity of Palmetto Federal is the
origination of single family residential mortgage loans. Additionally, the Bank
operates under an investment policy which primarily is aimed at originating long
term fixed rate mortgage loans in accordance with Federal National Mortgage
Association ("FNMA") and Federal Home Loan Mortgage Corporation ("FHLMC")
underwriting guidelines for sale in the secondary market. The Bank's adjustable
rate mortgages generally are made in accordance with FNMA underwriting
guidelines, however, the Bank's present investment policy is to retain these
loans in its portfolio. Palmetto Federal also originates construction loans on
single family and, to a lesser extent, multi-unit dwellings and conventional
mortgage loans on multi-unit dwellings and on commercial and other type
properties. In addition, Palmetto Federal offers mobile home, automobile, home
improvement and unsecured consumer loans. The Bank also offers a home equity
line of credit secured by the borrower's residence.
From 1991 through 1993, the Bank capped the aggregate levels of consumer,
commercial, commercial real estate, non-residential and land loans at the March,
1991 levels in response to increased OTS risk-based capital requirements and to
lower the overall level of credit risk in its portfolio. In 1994, the Bank
discontinued this limit on the aggregate level of its commercial and consumer
loans and changed its lending strategy to increase the origination of higher
yielding consumer and commercial loans, including commercial real estate loans
greater than $1.0 million. These loans typically involve more risk than
associated with residential lending. Commercial mortgages outstanding increased
from $109.5 million at December 31, 1994 to $128.1 million at December 31, 1995.
The 1995 originations included eight commercial real estate loans of $1.0
million or greater, totalling $13.1 million, compared to only one loan of this
scope in 1994.
In 1995, the Bank continued to expand its lending markets to reduce
reliance on the Central Savannah River Area ("CSRA") market area. In 1995, 40%
or $42.9 million of the Bank's permanent residential mortgage and construction
loans were originated in the CSRA market compared to 61% or $72.8 million in
1994. The Lexington mortgage office, which opened in 1994, originated $8.4
million in loans or 7.9% of the 1995 total compared to $1.3 million or 1.1% of
the 1994 total. The Charleston office originated $19.8 million in loans or
18.6% of the 1995 total compared to $12.9 million in loans or 10.8% of the 1994
total.
Palmetto Federal reviews and annually revises, as necessary, its
underwriting and lending practices and loan policies in response to regulatory
changes. Underwriting guidelines, including loan to value ratios, are
established for each type of loan. The Bank's underwriting standards and
guidelines for each loan type are reviewed annually with any amendments or
revisions presented to the Board of Directors for approval. These guidelines
are in addition to the requirements of outside agencies and investors. The
Bank's lending policies are reviewed for compliance with applicable regulations
and rules, including Federal Truth-In-Lending, the Equal Credit Opportunity Act,
the Fair Credit Reporting Act, the Fair Housing Act, the Home Mortgage
Disclosure Act, the Real Estate Settlement Procedures Act, and applicable state
usury requirements.
At December 31, 1995, the Bank held approximately $207.7 million in
permanent 1-4 single family first mortgage loans, $28.9 million of which
exceeded a 80% loan to value ratio without private mortgage insurance and $8.6
million of which exceeded a 90% loan to value ratio. These higher loan to value
ratio loans constitute increased risk to the portfolio, but the Bank's loss
experience for these loans has not been significant.
2
The following tables are a comparison of Palmetto Federal's loan
portfolio at the dates indicated. Loans held for sale are classified as
permanent residential mortgage loans.
December 31, 1995
-------------------------------------------------------------------------
% of
Loan
Variable Fixed Total Portfolio
-------- ----- ----- ---------
(dollars in thousands)
Loans collateralized by real estate:
Permanent residential mortgage $ 149,622 $ 58,049 $ 207,671 42.7%
Construction 15,051 23,063 38,114 7.8
Second mortgage 29,027 23,286 52,313 10.8
Commercial 71,817 56,234 128,051 26.3
Loans collateralized by other property
or unsecured:
Consumer 6,405 33,180 39,585 8.1
Commercial 8,082 7,998 16,080 3.3
Loans collateralized by savings accounts 0 4,769 4,769 1.0
------- ------- ------- ------
Total gross loans $ 280,004 $ 206,579 $ 486,583 100.0%
------- ------- ------- ------
------- ------- ------- ------
57.5% 42.5% 100.0%
---- ---- -----
---- ---- -----
Mortgage-backed securities $ 0 $ 77,843 $ 77,843
---- ------- -------
---- ------- -------
0% 100.0% 100.0%
---- ----- -----
---- ----- -----
December 31, 1994
---------------------------------------------------------------------
% of
Loan
Variable Fixed Total Portfolio
-------- ----- ----- ---------
(dollars in thousands)
Loans collateralized by real estate:
Permanent residential mortgage $ 115,450 $ 90,854 $ 206,304 44.2%
Construction 7,747 25,911 33,658 7.2
Second mortgage 30,194 25,457 55,651 11.9
Commercial real estate 50,588 58,946 109,534 23.5
Loans collateralized by other property
or unsecured:
Consumer 3,978 38,554 42,532 9.1
Commercial 8,304 6,873 15,177 3.3
Loans collateralized by savings accounts 0 3,784 3,784 0.8
----- ------- ------- ----
Total gross loans $216,261 $250,379 $466,640 100.0%
------- ------- ------- -----
------- ------- ------- -----
46.3% 53.7% 100.0%
---- ---- -----
---- ---- -----
Mortgage-backed securities $ 0 $106,273 $106,273
--- ------- -------
--- ------- -------
0% 100.0% 100.0%
--- ----- -----
--- ----- -----
3
December 31, 1993
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% of
Loan
Variable Fixed Total Portfolio
-------- ----- ----- ---------
(dollars in thousands)
Loans collateralized by real estate:
Permanent residential mortgage $ 132,122 $ 71,644 $ 203,766 43.6%
Construction $ 1,314 $ 25,499 $ 26,813 5.8%
Second mortgage 30,368 26,785 57,153 12.3
Commercial 61,090 49,197 110,287 23.7
Loans collateralized by other property
or unsecured:
Consumer 8,229 39,698 47,927 10.3
Commercial 9,008 7,516 16,524 3.6
Loans collateralized by savings accounts $ 0 3,447 3,447 0.7
-------- ------- ------- -----
Total gross loans $ 242,131 $ 223,786 $ 465,917 100.0%
-------- -------- ------- ------
-------- -------- ------- ------
52.0% 48.0% 100.0%
---- ---- -----
---- ---- -----
Mortgage-backed securities $ 0 $106,563 $106,563
-------- ------- -------
-------- ------- -------
0% 100.0% 100.0%
--- ----- -----
--- ----- -----
December 31, 1992
----------------------------------------------------------------------
% of
Loan
Variable Fixed Total Portfolio
-------- ----- ----- ---------
(dollars in thousands)
Loans collateralized by real estate:
Permanent residential mortgage $ 119,198 $ 76,385 $ 195,583 41.3%
Construction 2,197 10,651 12,848 2.7
Second mortgage 30,195 29,689 59,884 12.6
Commercial 63,061 67,797 130,858 27.6
Loans collateralized by other property
or unsecured:
Consumer 5,248 45,766 51,009 10.8
Commercial 11,248 8,837 20,085 4.2
Loans collateralized by savings accounts 0 3,974 3,974 0.8
-------- ------- ------- -----
Total gross loans $ 231,142 $ 243,099 $ 474,241 100.0%
-------- -------- ------- ------
-------- -------- ------- ------
48.7% 51.3% 100.0%
---- ---- -----
---- ---- -----
Mortgage-backed securities $ 36,695 $ 88,434 $ 125,129
-------- ------- -------
-------- ------- -------
29.3% 70.7% 100.0%
--- ----- -----
--- ----- -----
4
December 31, 1991
----------------------------------------------------
% of
Loan
Variable Fixed Total Portfolio
-------- ----- ----- ---------
(dollars in thousands)
Loans collateralized by real estate:
Permanent residential mortgage $109,183 $ 94,232 $203,415 38.6%
Construction 0 19,946 19,946 3.8
Second mortgage 51,888 31,286 83,174 15.8
Commercial 82,614 46,183 128,797 24.5
Loans collateralized by other property
or unsecured:
Consumer 5,022 57,592 62,614 11.9
Commercial 13,090 11,097 24,187 4.6
Loans collateralized by savings accounts 0 4,373 4,373 0.8
-------- -------- -------- -----
Total gross loans $261,797 $264,709 $526,506 100.0%
-------- -------- -------- -----
-------- -------- -------- -----
49.7% 50.3% 100.0%
-------- -------- --------
-------- -------- --------
Mortgage-backed securities $ 0 $ 61,249 $ 61,249
---- -------- --------
---- -------- --------
0% 100.0% 100.0%
---- ----- -----
---- ----- -----
LOAN MATURITIES. The following table sets forth certain information at
December 31, 1995 regarding the dollar amount of loans and mortgage-backed
securities maturing in Palmetto Federal's portfolio based on their contractual
terms to maturity. Demand loans, loans having no stated schedule of repayment
and no stated maturity and overdrafts are reported as due by December 31, 1995.
Payments Due Within
---------------------------------------------------------------------
More than
1 Year 1-2 Years 2-3 Years 3-5 Years 5 Years Total
------ --------- --------- --------- --------- -------
(in thousands)
Real estate mortgage $ 71,140 $ 71,160 $ 71,160 $ 83,673 $ 90,902 $388,035
Real estate construction 38,114 0 0 0 0 38,114
Installment, commercial,
and loans collateralized
by savings accounts(1) 25,535 10,886 10,886 10,691 2,436 60,434
-------- -------- -------- -------- -------- --------
Total $134,789 $ 82,046 $ 82,046 $ 94,364 $ 93,338 $486,583
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
- -------------------
(1) Includes second mortgage equity cashline.
5
The following table sets forth loans due after one year which have fixed
rates or floating or adjustable rates.
December 31, 1995
--------------------------------------------
Floating or
Adjustable Rate Fixed Rate
---------------- ----------------------
% of % of
Total Loan Total Loan
Amount Portfolio Amount Portfolio
------ --------- ------ ---------
(dollars in thousands)
Real estate mortgage $168,643 34.66% $148,252 30.47%
Real estate construction 0 -- 0 --
Installment, commercial, and loans
collateralized by savings accounts 9,083 1.87 25,816 5.31
------- ----- ------- ----
Total $177,726 36.53% $174,068 35.78%
------- ----- ------- -----
------- ----- ------- -----
CONSTRUCTION LOANS. Palmetto Federal provides construction financing for
single family, multi-family and nonresidential commercial real estate.
Construction loans are generally made for periods of six months to one year.
This period may be extended subject to negotiation and the payment of an
extension fee. Typically, interest rates on construction loans for loan terms
over one year are tied to an indexed rate and are adjustable monthly or
quarterly during the term of the loan. The Bank's policies allow residential
construction loans to builders for both presold and "spec" homes for up to an
85% loan to value ratio. The Bank also makes a combined construction/permanent
loan to individuals which combines a construction loan with a permanent mortgage
loan for up to a 95% loan to value ratio. As of December 31, 1995, the Bank had
approximately $3.6 million of single family construction loans, including loans
in process, that exceeded an 80% loan to value ratio. At December 31, 1995,
total construction loans comprised approximately 7.8% or approximately $38.1
million of the Bank's loan portfolio. Included in the Bank's total construction
loans were approximately $33.1 million in single family residential construction
loans, of which approximately $18.1 million were loans to builders for "spec"
homes. The Bank's loss experience for this loan category has been minimal.
COMMERCIAL REAL ESTATE LOANS. Commercial real estate loans made by
Palmetto Federal are secured by office buildings, shopping centers, multi-family
apartment and condominium projects with more than four dwelling units.
Permanent commercial real estate loans are generally made for up to 80% of the
appraised value of the properties securing the loan with interest rates
determined by market conditions. In certain cases the appraised value of the
financed projects is based on the ultimate use of the project rather than its
present use (e.g., the appraisal of a project of rental units may be based on
the proposed future sale of such units as condominiums). Generally, the
majority of the Bank's loan charge-offs have been in this loan category. As of
December 31, 1995, the Bank had approximately $128.1 million in commercial real
estate loans, which comprised approximately 26.3% of the Bank's loan portfolio.
Palmetto Federal also makes commercial real estate loans for land
acquisition, development and/or construction costs. Such loans for residential
projects are generally made for periods of up to three years while loans for
commercial projects are generally made for periods of up to two years.
Typically, such loans with a term over one year are tied to an indexed rate and
are adjustable monthly or quarterly during the term of the loan. Generally,
Palmetto Federal's loan underwriting policies for acquisition, development and
construction project loans are the same as for permanent commercial real estate
loans, however, loans made to finance the sale of foreclosed property may be
made at higher loan to value ratios and favorable interest rates to expedite the
reduction of the Bank's foreclosed property. Certain land acquisition,
development
6
and/or construction loans made prior to 1987 were in an amount equal to 100% of
the aggregate costs of the financed project, including land acquisition costs,
development costs, construction costs and interest costs. Palmetto Federal
generally does not require a developer to obtain a completion bond guaranteeing
the completion of the financed project in the event that the developer, for any
reason, is unable to perform. In any instance in which it has not obtained a
completion bond, however, Palmetto Federal generally requires a personal
guarantee by the developer.
SECOND MORTGAGE LOANS. Second mortgage residential loans comprised
approximately $52.3 million or 10.8% of the Bank's loan portfolio at December
31, 1995. The Bank's second mortgage loans consist of approximately $23.3
million in term loans primarily for home improvements and approximately $29.0
million in home equity line of credit loans. These loans typically have a
maximum loan to value ratio of 90%.
CONSUMER AND MOBILE HOME LOANS. At December 31, 1995, consumer loans
constituted 8.1% or approximately $39.6 million of Palmetto Federal's loan
portfolio. The consumer loan portfolio is made up of mobile home, automobile
and unsecured loans. During 1995, the Bank originated approximately $1.7
million in mobile home loans. The Bank makes mobile home loans for new mobile
homes for up to 90% of the purchase price of the home, not to exceed 120% of
dealer's cost. Mobile home and automobile loans represented 56.1% and 15.2%,
respectively, of Palmetto Federal's consumer loan portfolio at December 31,
1995. Palmetto Federal also offers Personal CashLine, which is an unsecured
consumer loan. At December 31, 1995, this revolving line of credit represented
7.1% of Palmetto Federal's consumer loan portfolio.
LOAN SALES AND PURCHASES. As economic conditions dictate, Palmetto Federal
engages in selling its fixed-rate loans in the secondary mortgage market to
reduce the gap between the maturities of its interest-earning assets and
interest-bearing liabilities. Palmetto Federal sells loans primarily on a
nonrecourse basis and at December 31, 1995 the Bank was servicing approximately
$237.1 million of loans sold to investors on a nonrecourse basis. At December
31, 1995 Palmetto Federal also was servicing approximately $5.3 million of loans
that it sold on a recourse basis prior to 1988. Loans sold on a recourse basis
generally have terms which require Palmetto Federal to repurchase the loans if
the borrower becomes 120 days past due or if a breach of representation and
warranty occurs (as defined in the applicable servicing agreements). Effective
October 1, 1995, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 122, "Accounting for Mortgage Servicing Rights", which requires
that the right to service mortgage loans for others be recognized as an asset,
whether that servicing right is acquired or originated. Servicing rights of
$153,000 were recorded during 1995 as a result of adopting this standard,
resulting in a gain of $101,000, net of related income taxes. See Note 1 of the
Consolidated Financial Statements, included in the Company's Annual Report to
Shareholders for the year ended December 31, 1995 (the "1995 Annual Report") and
incorporated herein by reference.
Palmetto Federal ordinarily retains the servicing of these loans for which
it generally receives a fee payable monthly of one-quarter to one-half of one
percent per year of the unpaid principal balance of each loan. The Bank's
servicing fees were $898,000, $816,000 and $498,000 in 1995, 1994 and 1993,
respectively. During 1992 Palmetto Federal sold approximately $150 million in
mortgage servicing rights. The only servicing rights sold in 1993 related to an
existing commitment from the 1992 sale. The Bank sold no significant servicing
rights in 1991, 1994 or 1995.
LOAN FEES. It is the general policy of Palmetto Federal to issue loan
commitments for a fee to qualified borrowers for a specified time period. These
commitments are generally for a period of 60 days. With management approval
commitments may be extended for up to six months. Palmetto Federal had
commitments to originate loans in a principal amount of approximately $13.5
million at December 31, 1995.
In addition to interest earned on loans and fees for issuing loan
commitments, Palmetto Federal receives loan fees for originating loans. Loan
origination fees are a percentage of the principal amount of the mortgage loan
and are charged to the borrower by Palmetto Federal for creation of the loan.
Loan fees, as
7
well as certain narrowly defined origination costs, are deferred and amortized
as an adjustment to the yield over the life of the related loan. The net
deferred fees are reflected in interest income over the appropriate amortization
period. In the case of adjustable rate mortgages, a substantial portion of the
net deferred fee on each individual loan is recognized as income over the first
adjustment period. Any remaining net deferred fees or costs associated with
loans that are sold are recognized as adjustments to the gains or losses on the
sales of such loans. Therefore, for loans originated and held by Palmetto
Federal, the loan origination fees are not separately identified in results of
operations, nor are the fees being recognized as income immediately upon closing
of the loans but are included in net interest income as an adjustment of yield.
LOAN DELINQUENCIES AND CLASSIFIED ASSETS
LOAN DELINQUENCIES. Palmetto Federal's collection procedures provide that
when a loan becomes 15 days delinquent the borrower is contacted by mail and
payment requested. If the delinquency continues, subsequent efforts are made to
contact and request payment from the delinquent borrower. In certain instances
Palmetto Federal may develop a repayment schedule with the borrower to enable
the borrower to restructure his or her financial affairs.
The accrual of interest income on loans in excess of 90 days past due is
generally suspended and previously recognized interest income reversed.
Additionally, the Bank discontinues the accrual of interest on any loan when it
determines the collection of interest is less than probable. If a nonaccrual
loan is restructured, the Company's policy is that the loan may accrue interest
only if the Bank's evaluation of the borrower's financial condition supports
full repayment of the restructured loan. If a loan continues in a delinquent
status for an additional 60 to 90 days, Palmetto Federal will initiate
foreclosure proceedings. All property acquired as the result of foreclosure or
by deed in lieu of foreclosure is classified as "real estate acquired in
settlement of loans" until such time as it is sold or otherwise disposed of by
Palmetto Federal.
On January 1, 1995, the Company adopted 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." Under this 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. The minimum
nonpayment period before management considers a loan to be impaired is 90
days. The types and characteristics of loans that are measured using SFAS
No. 114 include individual loans greater than $500,000 or a group of related
loans to a single borrower aggregating more than $500,000. These loans are
typically collateral dependent commercial real estate loans. All other
loans generally are measured under net realizable value techniques or, as
in the case of small homogeneous loans, under a methodology which includes
loan classifications and historical charge-offs. Impaired loans typically
are not charged off until foreclosure on the collateral property.
Occasionally, an impaired loan is partially charged off as part of a loan
restructuring. Nonaccrual loans are typically 90 days or more delinquent
and may include loans within the scope of SFAS No. 114. Impaired loans
may include accruing loans which have a specific valuation allowance or
which have been restructured. Also under this standard, in-substance foreclosed
loans 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. See Note 1 of the Consolidated Financial
Statements, included in the Company's 1995 Annual Report and incorporated herein
by reference.
The amounts and categories of Palmetto Federal's nonperforming assets
(nonaccrual loans and foreclosed real estate ("REO")) and restructured loans,
changes in the components of nonperforming assets and restructured loans, and
additional information concerning the Bank's nonperforming assets and
restructured loans is set forth in "Management's Discussion and Analysis of
Financial Condition and Results of Operations (hereinafter referred to as
"Management's Discussion and Analysis") -- Nonperforming Assets and Restructured
Loans," included in the Company's 1995 Annual Report and incorporated herein by
reference.
The additional interest income that would have been earned during the year
ended December 31, 1995 if the restructured loans noted above had been current
in accordance with their original terms and had been outstanding throughout the
year ended December 31, 1995 was approximately $222,000. The amount of interest
income on the restructured loans included in net earnings for the year ended
December 31, 1995 was approximately $428,000. Although restructured loans
include loans which are considered to be earning assets, there is more than
normal risk associated with these loans due to the fact that some were made to
facilitate
8
the sale of foreclosed real estate and some were restructured with terms that
either extend the maturity or reduce the stated interest rate.
Potential problem loans represent loans that are current as to payment of
principal and interest, but where management has doubts about the borrowers'
ability to comply with present repayment terms. These loans are not included in
nonperforming assets. At December 31, 1995, potential problem loans totalled
approximately $9.4 million.
Management of Palmetto Federal establishes an allowance for possible loan
losses each year based on its estimate of losses in the loan portfolio. The
loan loss allowance is charged against Palmetto Federal earnings in the year in
which the allowance is established. Loan charge-offs are charged against the
loan loss allowance. At December 31, 1995, the loan loss allowance was $8.4
million or approximately 1.8% of total loans. Additional information concerning
Palmetto Federal's loan loss allowances for 1995 is set forth in "Management's
Discussion and Analysis -- Nonperforming Assets and Restructured Loans,"
appearing in the Company's 1995 Annual Report and incorporated herein by
reference.
The determination of the adequacy of the Bank's allowance for loan losses
is based upon management's assessment of risk elements in the portfolio, factors
affecting loan quality and assumptions about the economic environment in which
the Bank operates. The Bank utilizes a loan classification system in assessing
the overall quality of its loan portfolio to determine an adequate allowance for
the level of loan losses, with specific emphasis on the Bank's larger loans.
This system involves an ongoing review of the Bank's commercial, real estate and
consumer loan portfolios and includes factors such as the cash flow and
financial status of the borrower, the existence and the value of the collateral
and general economic conditions. This system is dependent upon management's
estimates and judgments and there can be no assurance that the Bank will not
have to increase its allowance for possible loan losses in the future as a
result of adverse markets for real estate and economic conditions generally in
the Bank's primary market areas, future increases in nonperforming assets or for
other reasons which would adversely affect the Bank's results of operations. In
addition, the Bank's principal regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowance for loan losses
and the carrying value of its other nonperforming assets, including foreclosed
real estate. Such agencies may require the Bank to recognize additions to the
allowance for loan losses based on their judgments at the time of their
examination. The following table describes the Bank's allocation of its
allowance for estimated loan losses.
1995 1994 1993 1992 1991
------------------ ----------------- ----------------- ---------------- ----------------
Allocation % Loans % Loans % Loans % Loans % Loans
of Allowance for to Total to Total to Total to Total to Total
Loan Losses: Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
- ----------------------- ------------------ ----------------- ----------------- ----------------- ----------------
(dollars in thousands)
Loans collateralized
by real estate:
Permanent residential $2,141 42.7% $1,545 44.5% $2,509 43.6% $ 1,961 41.1% $ 2,053 38.6%
Construction 564 7.8 539 7.3 442 5.8 196 2.7 203 3.8
Second mortgage 780 10.8 832 12.0 941 12.3 912 12.7 846 15.8
Commercial 4,037 26.3 4,148 22.9 4,712 23.7 3,986 27.7 5,005 24.5
Loans collateralized
by other property
or unsecured:
Consumer 585 8.1 695 9.2 800 10.3 812 10.8 657 11.9
Commercial 238 3.3 397 3.3 422 3.6 305 4.2 246 4.6
Savings accounts 72 1.0 57 0.8 57 0.7 60 0.8 44 0.8
------ ----- ----- ----- ----- ----- ------ ----- ----- -----
Total allowance $8,417 100.0% $8,213 100.0% $9,883 100.0% $ 8,232 100.0% $9,054 100.0%
------ ----- ----- ----- ----- ----- ------ ----- ----- -----
------ ----- ----- ----- ----- ----- ------ ----- ----- -----
9
The Company maintains both specific and general loan loss allowances on
its loan portfolio. The following table details changes in the general and
specific loan loss allowances for 1995.
Specific General Total
-------- ------- -----
(in thousands)
Balance December 31, 1994 $1,289 $6,924 $8,213
Provision for estimated losses 1,129 193 1,322
Charge-offs (1,706) (64) (1,770)
Recoveries 481 171 652
------ ------ ------
Balance December 31, 1995 $1,193 $7,224 $8,417
------ ------ ------
------ ------ ------
CRITICIZED ASSETS. OTS regulations require thrifts to monitor and
classify their assets to establish a mechanism of early identification of
problem loans and to calculate and provide for prudent valuation allowances.
Institutions are also required to classify their own assets and to establish
prudent general allowances for loan losses. An institution also is required to
set aside adequate valuation allowances to the extent an affiliate possesses
assets requiring classification and poses a risk to the institution. OTS
regulations also require institutions to establish loss allowances for off-
balance sheet items when a loss becomes probable and estimable. The
determination of the individual asset classification depends on the degree of
risk associated with the asset and the likelihood of repayment or orderly
liquidation. The portion of a loan or other asset classified as loss is
considered uncollectible and a specific valuation allowance is established for
the portion of the asset so classified. For the portion of assets classified as
loss, the OTS permits institutions either to establish specific allowances for
losses of 100% of the amount classified or to charge-off such amount. A
doubtful asset has a high possibility of loss, but certain pending factors
preclude the estimation of a specific valuation allowance. Palmetto Federal
classifies an asset as substandard if the asset exhibits a defined weakness and
is inadequately protected either by the paying capacity of the borrower or the
value of the underlying collateral. Special mention loans have some credit
deficiencies as potential weaknesses that if not corrected could increase the
risk of financial loss. The Bank's total criticized assets include its
nonperforming assets and restructured loans as well as its potential problem
loans. The following table summarizes the Bank's criticized assets at December
31:
1995 1994 1993
-------- -------- -------
(in thousands)
Special mention $ 9,867 $11,050 $12,470
Substandard 25,450 30,138 40,904
Doubtful 0 0 755
Loss 1,462 1,822 4,265
------ ------ ------
$36,779 $43,010 $58,394
------ ------ ------
------ ------ ------
10
INVESTMENT ACTIVITIES
The Company invests in mortgage-backed and related securities.
Included in the Company's securities portfolio are mortgage-backed securities
which are insured or guaranteed by FNMA or Government National Mortgage
Association ("GNMA"). Mortgage-backed securities increase the quality of the
Company's assets by virtue of the guarantees that back them, require less
capital under risk-based capital rules than nonguaranteed mortgage loans, are
more liquid than individual mortgage loans and may be used to collateralize
borrowings or other obligations of the Company. The returns and other
information concerning such securities are outlined below.
Year ended December 31,
--------------------------------
1995 1994 1993
---- ---- ----
(dollars in thousands)
Average yield for period 6.61% 5.85% 6.58%
Average rate at end of period 6.76% 6.72% 6.88%
Interest income earned $ 6,335 $ 6,237 $ 8,035
Average balance for the period 95,803 106,602 122,134
Fair value at end of period 79,181 101,909 106,561
Amortized cost at end of period 77,736 108,621 106,151
Net unrealized gain (loss) $ 1,445 $ (6,712) $ 410
Through an investment policy approved by its Board of Directors,
Palmetto Federal invests funds necessary to comply with liquidity regulations
and other funds not needed currently for loans in short-term investments. At
December 31, 1995, Palmetto Federal held investments in United States Treasury
and agency securities with a fair value of approximately $39.9 million. In 1995
the Bank received proceeds of $76.9 million from the sale of loans, investment
and mortgaged-backed securities. See Note 2 of the Consolidated Financial
Statements, included in the Company's 1995 Annual Report and incorporated herein
by reference.
The following table sets forth information for Palmetto Federal with
respect to yields on loans, yields on investments and cost of funds on deposits
and borrowings for the periods indicated.
For The Years Ended December 31,
----------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
Weighted average yields on:
Loans receivable 8.90% 8.49% 8.48% 9.26% 10.34%
Mortgage-backed securities 6.61 5.85 6.58 7.15 7.71
Investment portfolio 5.85 5.40 3.99 5.45 7.02
All interest-earning assets 8.24 7.73 7.76 8.54 9.81
Weighted average rate paid on:
Retail savings deposits 2.66 2.66 2.87 3.74 4.87
Brokered time deposits -- 9.55 6.98 9.18 9.33
Retail time deposits 5.80 4.94 5.27 6.19 7.64
Interest-bearing demand deposits 2.40 2.09 2.64 3.70 4.31
FHLB advances and other borrowed money 6.58 5.72 6.20 6.79 7.91
All interest-bearing liabilities 5.10 4.36 4.81 5.80 7.14
Net interest margin (difference between
average rates on all interest-earning
assets and interest-bearing
liabilities) 3.14 3.37 2.95 2.74 2.67
Net yield (net interest income as a
percentage of average interest
earning assets) 3.26% 3.37% 2.79% 2.54% 2.32%
11
The following table sets forth information for the Bank with respect to
weighted average contractual yields on loans, yields on investments and the cost
of funds on deposits and borrowings at December 31:
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
Weighted average yields on:
Loans receivable 8.87% 8.34% 8.25% 8.90% 9.94%
Mortgage-backed securities 6.76 6.72 6.88 6.46 7.11
Investment portfolio 5.50 5.72 4.73 5.34 6.12
All interest-earning assets 8.20 7.80 7.78 8.14 9.17
Weighted average rate paid on:
Retail savings deposits 2.65 2.71 2.71 3.04 4.50
Brokered time deposits -- -- 9.38 8.31 8.71
Retail time deposits 6.07 4.90 4.92 5.69 7.00
Interest bearing demand deposits 2.42 2.10 2.39 2.46 3.22
FHLB advances & other borrowed money 6.56 6.72 5.98 6.46 7.29
All interest-bearing liabilities 5.22 4.73 4.45 5.27 6.56
Net interest margin 2.98% 3.07% 3.33% 2.87% 2.61%
The tables below set forth the book value of the Company's investments
at the dates indicated, the weighted average yields on investments for the years
ended on the dates indicated and the periods to maturity from December 31, 1995.
At December 31,
--------------------------------------------------------------------
1995 1994 1993
-------------------- -------------------- --------------------
(dollars in thousands)
Market Market Market
Cost Value Cost Value Cost Value
----- ------- ----- ------- ----- -------
U.S. Treasury and agency
obligations:
held-to-maturity $ 8,940 $ 8,879 $39,105 $36,011 $ 6,282 $ 6,372
U.S. Treasury and agency
obligations:
available-for-sale 31,230 31,060 4,988 4,884 14,928 15,092
Corporate obligations 0 0 1,998 1,825 100 99
Other investments 0 0 3 62 25 88
------- ------- ------- ------ ------ ------
Total $ 40,170 $ 39,939 $46,094 $42,782 $21,335 $21,651
------- ------- ------- ------ ------ ------
------- ------- ------- ------ ------ ------
Weighted average yield on
investments for the year 5.53% 5.30% 4.15%
---- ---- ----
---- ---- ----
12
Periods to maturity from December 31, 1995
------------------------------------------------------
Held to Maturity Available for Sale
---------------------- ------------------------
Weighted Weighted
Average Average
Cost Yield Cost Yield
---- ----- ---- -----
(in thousands) (in thousands)
U.S. Treasury and agency obligations:
1 year or less $ 0 -- % $ 5,996 4.90%
1-5 years 2,960 5.12 21,829 5.55
5-10 years 5,980 5.41 3,000 5.70
after 10 years 0 -- 405 7.41
Corporate obligations:
1 year or less 0 -- 0 --
1-5 years 0 -- 0 --
5-10 years 0 -- 0 --
after 10 years 0 -- 0 --
Other investments:
1 year or less 0 -- 0 --
1-5 years 0 -- 0 --
5-10 years 0 -- 0 --
after 10 years 0 -- 0 --
--- ---- --- ----
Total $8,940 5.37% $31,230 5.46%
------ ---- ------- ----
------ ---- ------- ----
ASSET/LIABILITY MANAGEMENT
Asset and liability management is the process by which Palmetto Federal
attempts to maximize net interest income while minimizing the adverse effect of
interest rate changes. The Company's Asset/Liability Committee sets loan and
deposit rates, reviews the interest sensitivity gap of the Bank and sets
policies and strategies to improve the interest rate risk exposure of the
portfolio and to increase the level of net interest income. Additional
information concerning the Bank's asset and liability management is included in
"Management's Discussion and Analysis -- Asset/Liability Management," appearing
in the Company's 1995 Annual Report and incorporated herein by reference.
13
The following static gap table sets forth in summary form the repricing
attributes of Palmetto Federal's interest-earning assets and interest-bearing
liabilities. Static gap is a simple measure of the difference between interest-
sensitive assets and interest-sensitive liabilities repricing for a particular
time period. A negative gap position indicates that cumulative interest-
sensitive assets are less than cumulative interest-sensitive liabilities and
indicates that net income would decrease if market rates increased. The time
periods in the table represent the time before an asset or liability matures or
can be repriced.
More
0 to 3 3 to 6 6 to 12 1 to 3 3 to 5 than 5
Months Months Months Years Years Years Total
-----------------------------------------------------------------------------
(dollars in thousands)
Interest-Sensitive Assets
Balloon and adjustable rate loans $120,394 $61,340 $84,167 $2,982 $6,990 $2,243 $278,116
Fixed rate mortgage and mortgage-
backed securities 6,212 10,187 19,525 81,063 42,422 51,439 210,848
Consumer and commercial loans 13,882 3,326 6,216 19,978 9,807 2,234 55,443
Investments 42,961 8,929 948 2,787 622 3,031 59,278
------- ------ ------ ------ ------ ------ -------
Total Interest-Sensitive Assets 183,449 83,782 110,856 106,810 59,841 58,947 603,685
------- ------ ------- ------- ------ ------ -------
Interest-Sensitive Liabilities
Regular savings 35,371 0 0 0 0 0 35,371
IFA accounts 12,205 0 0 0 0 0 12,205
NOW accounts 61,569 1,239 2,482 6,272 6,272 10,455 88,289
Fixed maturity deposits 113,046 42,573 85,148 83,318 30,520 0 354,605
------- ------ ------ ------ ------ ------ -------
Total Deposits
(excluding accrued interest) 222,191 43,812 87,630 89,590 36,792 10,455 490,470
------- ------ ------ ------ ------ ------ -------
FHLB advances and other
borrowed money 65,168 15,000 17,600 0 0 0 97,768
------ ------ ------ ------ ------ ------ ------
Total Interest-Sensitive Liabilities 287,359 58,812 105,230 89,590 36,792 10,455 588,238
------- ------ ------- ------ ------ ------ -------
Interest Sensitivity Gap (103,910) 24,970 5,626 17,220 23,049 48,492 $15,447
-------- ------ ----- ------ ------ ------ -------
-------- ------ ----- ------ ------ ------ -------
Cumulative Gap $(103,910) $(78,940) $(73,314) $(56,094) $(33,045) $15,447
-------- ------- ------- ------- ------- ------
-------- ------- ------- ------- ------- ------
Ratio of cumulative gap to total
interest-sensitive assets (17.21)% (13.08)% (12.14)% (9.29)% (5.47)% 2.56%
14
SOURCES OF FUNDS
GENERAL. Palmetto Federal's principal sources of funds are deposits,
principal and interest payments on loans, investment and mortgage-backed
securities, proceeds from sales of investment and mortgage-backed securities,
FHLB advances, other borrowings and retained earnings. Loan repayments are a
relatively stable source of funds, while deposit flows are significantly
influenced by general interest rates and economic conditions.
The following table sets forth the average amount of and the average
rate paid on the following deposits.
Years Ended December 31,
-----------------------------------------------------------------------
1995 1994 1993
------------------- ------------------------ ------------------
Weighted Weighted Weighted
Average Average Average
Amount Rate Amount Rate Amount Rate
------ ----- ------- ------ ------- ---------
(dollars in thousands)
Savings deposits $ 31,074 2.66% $ 31,409 2.66% $ 29,808 2.87%
Time deposits 365,020 5.80 325,360 4.96 345,341 5.33
Interest-bearing demand
deposits (including non-interest-
bearing demand deposits) 98,666 1.71 115,615 1.56 115,762 1.94
------- ------- -------
Total deposits $494,760 4.79% $472,384 4.36% $490,911 4.38%
------- ------- -------
------- ------- -------
DEPOSIT ACTIVITIES. The primary sources of deposits for Palmetto
Federal are time deposits and various types of short-term money market and
checking (NOW) accounts and other savings alternatives that are responsive to
market conditions. The ability of Palmetto Federal to attract and maintain
deposits and Palmetto Federal's cost of funds have been, and will continue to
be, significantly affected by money market conditions. See "Management's
Discussion and Analysis -- Asset/Liability Management," included in the
Company's 1995 Annual Report and incorporated herein by reference. Palmetto
Federal currently does not use brokered deposits as a source of funds.
15
The following table sets forth deposit account balances, excluding accrued
interest payable, by account type, original term and weighted average interest
rate at the date indicated.
At December 31, 1995
-----------------------------------------------------
Weighted Percentage
Type of Average of Total
Account Amount Interest Rate Deposits
- ------- ---------- ------------- ----------
(in thousands)
NOW accounts $ 88,815 5.73% 17.91%
Money market deposit
accounts 10,795 3.12 2.18
Passbook and commercial
savings 33,052 2.65 6.67
Time Deposits
Jumbo certificates 54,060 6.31 10.90
Other time deposits:
60 day 19,308 3.69 3.89
6 month 33,426 5.58 6.74
8 month 14,168 5.69 2.86
12 to 15 month 112,798 6.17 22.74
18 to 24 month 46,053 6.04 9.29
30 month 20,282 6.25 4.09
36 to 48 month 7,202 6.01 1.45
60 month or more 49,169 7.05 9.92
Other 6,727 5.35 1.36
------- ------ ------
Total $495,855 4.98% 100.00%
------- ---- ------
------- ---- ------
The following table sets forth the time deposits of Palmetto Federal
classified by rates as of the dates indicated.
At December 31,
---------------------------
Rate 1995 1994 1993
------ -------- -------- --------
Less than 4.00% $ 20,943 $ 67,689 $160,681
4.01 - 6.00% 165,733 201,388 94,596
6.01 - 8.00% 165,057 52,195 36,735
Above 8.00% 11,460 20,088 41,384
-------- ------- --------
$363,193 $341,360 $333,396
-------- -------- --------
-------- -------- --------
16
The following table sets forth the amount and scheduled maturities of time
deposits at December 31, 1995.
Amount Due
----------------------------------------------------------------------
Less Than After
One Year 1-2 Years 2-3 Years 3 Years Total
-------- --------- --------- ------- --------
(dollars in thousands)
Less than 5.25% $ 35,324 $ 1,371 $ 1,131 $ 382 $ 38,208
5.25 - 7.00% 192,047 38,137 8,831 24,912 263,927
7.01 - 9.00% 16,787 27,674 3,451 5,746 53,658
9.01 - 11.00% 48 2,148 4,755 449 7,400
------- ------- ------ ------ -------
Total scheduled
maturities $244,206 $69,330 $18,168 $31,489 $363,193
-------- ------- ------- ------- --------
-------- ------- ------- ------- --------
As of December 31, 1995, the Bank had approximately $81.6 million in
retail certificates of deposits with maturities between one to three years with
a weighted average rate of 5.97%. The Bank also had approximately $37.5 million
in retail certificates of deposit at December 31, 1995 with maturities of
greater than three to six years with a weighted average rate of 5.41%.
The following table sets forth the maturities of time certificates in
amounts of $100,000 or more.
December 31, 1995
--------------------------------------------------------------------
3 Months 3 to 6 6 to 12 Over
or Less Months Months 12 Months Total
-------- ------ ------- --------- -------
(dollars in thousands)
$20,271 $14,655 $19,797 $28,222 $82,945
------ ------ ------ ------ ------
------ ------ ------ ------ ------
BORROWING ACTIVITIES. At December 31, 1995, Palmetto Federal had advances
totalling approximately $91.5 million from the Federal Home Loan Bank of Atlanta
("FHLBA") at rates from 5.73% to 9.10% payable at various dates through July
1997.
17
The short-term borrowings by Palmetto Federal at the end of and during the
periods indicated and the maximum amount outstanding at any month-end during
each period are set forth in the following table.
At December 31,
----------------------------------
1995 1994 1993
---- ---- ----
(dollars in thousands)
Total short-term borrowings at the
end of period:
FHLBA advances $ 81,500 $ 98,200 $ 71,600
Weighted average interest rate at
end of period:
FHLBA advances 6.59% 6.38% 4.09%
Average amounts outstanding:
FHLBA advances $ 82,135 $ 88,792 $ 70,630
Maximum amount outstanding at any
month:
FHLBA advances $ 90,200 $ 98,200 $107,800
PALFED INVESTMENT SERVICES
PALFED Investment Services, Inc., formerly PALFED Financial Services, Inc.
("PALFED Investment"), a wholly-owned subsidiary of PALFED, offers retail
securities brokerage services and sells tax-deferred annuities and consumer
insurance products. Net pre-tax income in 1995 of PALFED Investment was
approximately $300,000 on revenues of $757,000.
PALFED Investment sells certain tax deferred annuities through Family
Financial Life Insurance Company ("Family Financial"), a Louisiana insurance
company that is directly or indirectly controlled by service corporations or
subsidiaries of savings institutions and their holding companies. PALFED
Investment also sells annuities through other insurance companies.
Additionally, Palmetto Federal sells credit life and mortgage insurance through
Family Financial. PALFED Investment owns, directly or indirectly, approximately
19 percent of the outstanding stock of Family Financial with an investment in
Family Financial stock of approximately $612,000. PALFED Investment received
approximately $26,000 in dividends and distributions from Family Financial in
1995. W. Barry Adams, Executive Vice President of Palmetto Federal and Senior
Vice President of PALFED Investment, serves as a director of Family Financial.
EFFECTS OF PURCHASE ACCOUNTING
Palmetto Federal acquired First Federal Savings and Loan Association of
Beaufort, South Carolina ("First Federal") in August, 1982. This acquisition,
accounted for using the purchase method of accounting, increased the assets and
liabilities of Palmetto Federal by approximately $107 million each and added
seven branches to its system, two of which have since been closed. In December
1993, the Company changed its method of amortizing goodwill by adopting the
provisions of SFAS No. 72, "Accounting For Certain Acquisitions of Banking or
Thrift Institutions", effective January 1, 1993. SFAS 72 (issued after the
First Federal acquisition) requires goodwill to be amortized over the estimated
life of the interest-earning assets acquired using the level yield method. The
Company believes the change in accounting principle is preferable because it
provides a better matching of the amortization of goodwill with the amortization
of purchased discount on the acquired interest-earning assets from the First
Federal acquisition. The change in accounting principle resulted in a $10.5
million noncash charge to 1993 earnings, reflecting the cumulative effect of
this
18
change for the periods prior to January 1, 1993. This change also reduced the
amount of goodwill amortization recognized in 1993 by approximately $649,000.
Management reviews the amortization periods (estimated lives) of the intangible
assets periodically and makes adjustments as needed.
The following table sets forth the actual effect on the Company's
operations for 1982 through 1995 of the First Federal acquisition and the sale
or repayment of loans acquired in such acquisition. The table also reflects the
pro forma effect on future periods' results of operations of the accretion and
amortization of the valuation adjustments recorded in connection with Palmetto
Federal's acquisition of First Federal on the basis of certain assumptions as to
the fair value of the assets and liabilities and an assumption that there will
be no sales of or prepayments on the acquired loans. If these assumptions are
not realized, the actual effects of the accretions and amortization of these
valuation adjustments will vary.
Increase (Decrease) in Net Income
----------------------------------------------------------
Amortization Amortization
Accretion of of Other
of Loan Intangibles Premiums and Net
Actual Discounts and Goodwill Discounts Effect
- ------ ----------- ------------ ------------ ------
1982 - 1991 $25,007,651 $ (8,313,551) $201,992 $ 16,896,092
1992 101,705 (956,880) 12,396 (842,779)
1993 125,545 (10,761,947) 12,396 (10,624,006)
1994 57,915 (260,825) 12,396 (190,514)
1995 77,765 (281,391) 12,396 (191,230)
Pro Forma
- ---------
1996 32,539 (242,255) 12,396 (197,321)
1997 28,471 (239,506) 12,396 (198,639)
1998 11,263 (227,874) 12,396 (204,214)
1999 20,336 (234,007) 12,396 (201,275)
2000 - 2007 53,810 (1,706,764) 21,840 (1,631,114)
----------- ------------- -------- -------------
Total $25,517,000 $(23,225,000) $323,000 $ 2,615,000
----------- ------------- -------- -------------
----------- ------------- -------- -------------
19
REAL ESTATE DEVELOPMENT
Palmetto Service Corporation ("PSC"), a wholly-owned subsidiary of
Palmetto Federal, has engaged in real estate development activities since 1980,
but currently is not engaged in any new real estate development activities.
Woodside Development Company of Aiken, Inc. ("WDC"), a wholly-owned subsidiary
of PSC, was the original developer of the Woodside Plantation development.
Effective November 1993, PSC transferred to WDC certain real estate properties
in projects it previously developed. PSC currently provides real estate
appraisal services in the Bank's market areas, engages in real estate brokerage
services, and has investments in two real estate partnerships. At December 31,
1995, Palmetto Federal's investment in PSC was approximately $5.8 million and it
had extensions of credits (including intercompany receivables and accounts
payable) of approximately $289,000 to PSC and WDC.
At December 31, 1995, PSC and WDC had a total investment as set forth
below in the following real estate developments and partnerships:
Woodside Plantation $4,482,000
The Rapids 944,000
Other developments 287,000
Real estate partnerships 720,000
----------
$6,433,000
----------
----------
WOODSIDE PLANTATION. Woodside Plantation is a single family planned
unit development of over 2,000 acres that includes a country club, two
eighteen hole golf courses and over 1,800 single family lots as well as
developed outparcels. Since the project's inception in 1986 through December
31, 1993, WDC developed 913 homesites and sold 693 homesites and certain
outparcels at Woodside Plantation providing revenues after closing costs of
approximately $27.3 million. In December 1990, WDC sold the Woodside Plantation
clubhouse, related golf courses, tennis and swimming facilities and amenities to
Woodside Plantation Country Club, Inc. ("WPCC"), a subsidiary of Club
Corporation of America, for approximately $6.8 million. Concurrent with the
sale of the club and related amenities, WDC entered into a membership agreement
with WPCC to purchase a minimum of 85 club memberships each year through
December 31, 1995, payable in quarterly installments of approximately $96,000.
In October 1993, WDC sold the assets of Woodside Cable, an operating division
that provided cable television services, for approximately $1.1 million.
In December 1993, WDC sold the remaining developed lots at Woodside
Plantation, together with seven outparcels, the development and sales offices at
Woodside Plantation, and the stock of Woodside Realty, Inc., a wholly-owned
subsidiary of WDC that provided real estate brokerage services for Woodside
Plantation, for approximately $4.1 million. In addition, the purchaser,
Woodside Development Limited Partnership (the "Purchaser"), assumed liabilities
of approximately $850,000 related to the obligation of WDC to purchase
memberships at Woodside Plantation Country Club. The Purchaser also entered
into a two year option agreement to acquire from WDC approximately 1,000 acres
of undeveloped land at Woodside Plantation. At December 31, 1995 WDC owned
approximately 1,000 acres of undeveloped acreage and two outparcels at Woodside
Plantation.
Palmetto Federal provided nonrecourse financing to the Purchaser of the
developed lots and other assets of WDC in an aggregate amount of approximately
$3.6 million. In addition, Palmetto Federal subsequently provided the Purchaser
a $500,000 construction loan to build townhouses at Woodside Plantation and six
separate construction loans in an aggregate amount of approximately $976,000 for
further construction at Woodside Plantation.
20
Due to slower than anticipated lot sales, the Purchaser was unable to
service its acquisition debt and completed a restructuring of the indebtedness
to the Bank in September 1995. 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 accrue and contribute up to $330,000 toward joint
marketing efforts over three years related to the 35 lots it received in the
restructuring; (3) the Company agreed to grant a two year extension until
December 31, 1997 of the Purchaser's option to purchase the remaining
undeveloped acreage; (4) the Company agreed to make the third and fourth quarter
1995 payments under the membership agreement to WPCC in the amount of $184,500;
and (5) the Purchaser agreed to bring the membership obligation current by
payment of $189,000. The Company paid $110,000 toward joint marketing in 1995.
The Company continues to have a significant concentration of risk
related to Woodside Plantation, exclusive of loans to individual homeowners at
Woodside Plantation, comprised of real estate held for development, acquisition
and development loans, foreclosed real estate and a 50 percent interest in a
partnership. The carrying values of these components were as follows at
December 31:
1995 1994
---- ----
(in thousands)
Undeveloped land: 1,000 acres and 2 outparcels $ 4,483 $ 4,483
Loans to WPCC 4,454 4,584
Loans to Woodside Development Limited Partnership 3,311 3,100
35 lots received in loan restructuring 492
Development loan to unrelated borrower 525
Investment in and loans to partnership 613 698
-------- --------
$13,878 $12,865
-------- --------
-------- --------
The ability of WPCC to repay its loans to the Bank also is based in part
on real estate sales at Woodside Plantation, which provides additional
memberships for the Woodside Plantation County Club. Pursuant to the membership
agreement with WPCC, WDC and subsequently Woodside Development Limited
Partnership paid an aggregate of $1.9 million from 1991 through 1995 to WPCC for
club memberships. Additionally, the membership agreement provides for a
contingent liability to purchase club memberships through December 31, 2000,
related to the number of lots sold in Woodside Plantation from January 1, 1996
to December 31, 2000. WPCC presently is in discussions with the Bank to modify
its loans from amortizing to interest only payments for 1996.
THE RAPIDS. PSC has developed The Rapids project, a planned unit
development of single family homesites located in North Augusta, South Carolina.
In 1991, PSC sold part of the land and completed development of all of the 115
homesites it planned to develop at this project. Since the project's inception
in 1986 through December 31, 1995, PSC has sold 77 homesites and 4 outparcels
providing revenues after closing costs of $3.7 million. At December 31, 1995,
Palmetto Federal had two outstanding construction loans to PSC for the
construction of "spec" homes on two of the homesites at this project. WDC has
38 homesites and two outparcels remaining held for sale at this project.
OTHER DEVELOPMENTS. WDC owns 5 single-family lots held for sale in two
communities in Aiken County, South Carolina known as Southwood and Midland
Valley. The lots in these two projects were developed by PSC in prior years.
REAL ESTATE PARTNERSHIPS. PSC has investments in two active real estate
partnerships totalling $326,000 at December 31, 1995. In 1995 these
partnerships had a net loss of approximately $193,000. The Bank had one
outstanding loan to these partnerships of $344,000 at December 31, 1995.
21
REGULATION
GENERAL
The Company is a savings and loan holding company subject to
regulations, examination, supervision and reporting requirements of the OTS. As
a savings association, Palmetto Federal is subject to extensive regulation by
the OTS. The lending activities and other investments of Palmetto Federal must
comply with various federal regulatory requirements, including regulations that
require the maintenance of reserves against deposits, limiting the nature of
loans and interest that may be charged thereon and restricting investments and
other activities. In addition, federal and state regulatory agencies also have
the authority to prevent a savings association from paying a dividend or
engaging in any other activity that, in the opinion of the regulators, would
constitute an unsafe or unsound practice. The OTS and FDIC periodically examine
Palmetto Federal for compliance with various regulatory requirements, and
Palmetto Federal must file reports with the OTS describing its activities and
financial condition. Palmetto Federal is also subject to examination by the
FDIC and must meet certain reserve requirements promulgated by the FRB. This
supervision and regulation is intended primarily for the protection of
depositors and the federal deposit insurance fund.
The Company also is subject to the periodic reporting requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), which
include the filing of annual, quarterly and other reports with the Securities
and Exchange Commission ("SEC").
FEDERAL SAVINGS AND LOAN HOLDING COMPANY REGULATION
As the owner of all of the stock of Palmetto Federal, the Company is a
savings and loan holding company subject to regulation by the OTS under the Home
Owners' Loan Act (the "HOLA"). As a unitary savings and loan holding company
owning only one savings association, the Company generally is allowed to engage
and invest in a broad range of business activities not permitted to commercial
bank holding companies or multiple savings and loan holding companies; provided
that Palmetto Federal continues to qualify as a "Qualified Thrift Lender." See
"Regulation of Palmetto Federal - Qualified Thrift Lender ("QTL") Test." In the
event of any acquisition by the Company of another insured institution
subsidiary, except for a supervisory acquisition, the Company would become a
multiple savings and loan holding company and would be subject to extensive
limitations on the types of business activities in which it could engage.
The Company is prohibited from directly or indirectly acquiring control
of any savings institution or savings and loan holding company without prior
approval from the OTS or from acquiring more than 5% of any voting stock of any
savings institution or savings and loan holding company which is not a
subsidiary. No entity can acquire more than 10% of the stock of the Company
without prior OTS approval (unless the acquisition is for investment purposes
only and for not more than 24.9% of the Company's stock, and the required
filings are made with the OTS). The HOLA provides that no company may acquire
"control" of a savings association without the prior approval of the OTS.
"Control" is generally denoted by a greater than 25% ownership interest in the
savings association or its holding company. Any company that acquires such
control becomes a "savings and loan holding company" subject to registration,
examination and regulation by the OTS.
REGULATION OF PALMETTO FEDERAL
SUPERVISORY AGREEMENT. In connection with the 1992 OTS Report of
Examination, which noted certain deficiencies and concerns regarding Woodside
Plantation, the level of criticized assets and capital levels, the OTS exercised
its discretion to treat Palmetto Federal as an institution requiring more than
normal supervision under the provisions of OTS Regulatory Bulletin ("RB") 3a-1.
This OTS designation entailed asset growth limitations, third party contract
limitations, and senior executive officer hiring notification and approval
provisions.
22
Effective March 23, 1993, Palmetto Federal entered into a Supervisory
Agreement with the OTS to ensure the correction of deficiencies noted by the OTS
in the 1992 Examination. The Supervisory Agreement contained provisions related
to the management and reduction of Palmetto Federal's loans to and investments
in Woodside Plantation; adoption and implementation of procedures and policies
regarding the identification and reporting of troubled debt restructurings and
accrual of interest on delinquent loans; preparation of detailed plans for
disposing of troubled assets; preparation of strategic plans and capital
maintenance plans for the Bank; and maintenance of a $7.2 million level of
general valuation allowances. The Bank submitted to the OTS within the time
periods provided in the Supervisory Agreement the budgets, strategic plans and
appraisals mandated by the Supervisory Agreement. The Bank also adopted and
implemented the policies and procedures regarding the reporting of troubled debt
restructurings required by the Supervisory Agreement.
Following the 1994 OTS Examination, the OTS terminated the restrictions
of RB 3a-1 in August 1994. In December 1994, the OTS terminated the remaining
provisions of the Supervisory Agreement, subject to the Bank's continuing the
policies and procedures that encompassed the intent of the Supervisory Agreement
and continuing to adhere to the projections contained in the Bank's plans
previously submitted to the OTS. Both actions by the OTS significantly reduced
the level of regulatory restrictions on the Bank's operations. Additionally,
the termination of the RB 3a-1 restrictions lowered the FDIC insurance premium
rate paid by the Bank.
REGULATORY CAPITAL REQUIREMENTS. OTS regulations (the "Regulatory
Capital Regulations") specify capital standards for thrifts consisting of three
components, a "core capital" requirement, a "tangible capital" requirement and a
"risk-based capital" requirement. The Regulatory Capital Regulations require
savings associations to maintain core capital in an amount not less than 3% of
adjusted total assets (the "leverage ratio") and to maintain tangible capital in
an amount not less than 1.5% of adjusted total assets. Under the Regulatory
Capital Regulations, thrifts are required to maintain capital equal to 8% of
risk-weighted assets. The OTS requires assets to be weighted on the basis of
risk and assigned a weighing factor of between 0% and 100%. Approximately one-
half of risk-based capital must consist of core capital and one-half may consist
of other preferred stock, a portion of general loan loss reserves and other
hybrid capital instruments such as convertible and subordinated debentures.
In determining compliance with the new capital standards, all of a
savings association's investments in and extensions of credit to any subsidiary
engaged in activities not permissible for a national bank are deducted from the
savings association's capital. The required deduction from capital for
investments in subsidiaries engaged in activities not permitted for a national
bank is phased in through July 1, 1996. At December 31, 1995, Palmetto Federal
had approximately $6.2 million in investments in and extensions of credit to a
subsidiary engaged in activities not permissible for national banks.
23
At December 31, 1995, Palmetto Federal complied with its capital
requirements as follows:
Tangible Core Risk-Based
Capital Capital Capital
-------- ------- ----------
(dollars in thousands)
Stockholder's equity $48,968 $48,968 $48,968
Additions:
Unrealized losses on debt securities,
net of related income tax 884 884 884
Qualifying general valuation allowances --- --- 5,291
Deductions:
Goodwill and other intangible assets (2,650) (2,650) (2,650)
Non-includable portions of investment
in subsidiaries (3,827) (3,827) (3,827)
Non-includable portion of nonresidential
construction and land loans --- --- (241)
----- ----- ------
Regulatory capital 43,375 43,375 48,425
Minimum regulatory requirement 9,586 19,172 33,865
------- ------- --------
Excess amount $33,789 $24,203 $14,560
-------- ------- --------
-------- ------- --------
Actual capital ratio 6.8% 6.8% 11.4%
Minimum regulatory capital ratio 1.5% 3.0% 8.0%
Fully phased-in regulatory capital $40,959 $40,959 $46,009
Fully phased-in regulatory capital requirement 9,547 19,095 33,659
------- ------- -------
Excess Amount $31,412 $21,864 $12,350
------- ------- -------
------- ------- -------
Included in the calculations of the Bank's capital requirements are
judgments and estimates of management. These judgments and estimates are
subject to review and scrutiny by the OTS and FDIC.
PROMPT CORRECTIVE ACTION. The Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA") made a number of changes affecting the
federal depository insurance funds and the operations of federally insured
banks and savings institutions and their affiliates. FDICIA required each
federal regulator, including the OTS, to adopt a system of prompt corrective
action indexed to an association's capital level. Effective December 19, 1992,
the OTS promulgated final regulations for a system of prompt corrective action,
which provides for certain mandatory supervisory actions as well as additional
discretionary supervisory actions if an institution's capital falls below
certain levels. Under these regulations, each depository institution must be
classified into one of five capital categories (well capitalized, adequately
capitalized, undercapitalized, significantly undercapitalized, or critically
undercapitalized) based on such institution's capitalization with respect to
the capital measures established by the applicable regulatory agency. All
institutions are prohibited from making any capital distributions or paying a
management fee to any controlling person if such action would cause the
institution to fall into one of the undercapitalized categories. The OTS at
its discretion may reclassify a savings association's capital category to the
next lowest level (but not to the "critically undercapitalized" level) if it
deems that association to be in an unsafe and unsound condition or if the
savings association has received and not corrected a less than satisfactory
rating for any of the equivalent CAMEL rating categories for asset quality,
management, earnings or liquidity in the most recent examination of the savings
association. The regulation also requires the regulators to take certain
specified actions for institutions that are determined to fall within any of
the three categories below the "adequately capitalized" level. These actions
range from prohibiting an institution from making any capital distributions or
paying management fees if the action would cause the institution to fall into
the "undercapitalized category" to the appointment of a
24
conservator or receiver for an institution that becomes "critically
undercapitalized". Management believes Palmetto Federal is presently considered
"well capitalized" under the FDIC's prompt corrective action guidelines.
FDICIA directed the OTS and other federal banking agencies to revise their
risk-based capital standards to ensure that the standards (i) take adequate
account of interest rate risk, concentration of credit risk and the risks of
nontraditional activities, and (ii) reflect the actual performance and expected
risk of loss of multifamily mortgages. Institutions with an "above-normal"
degree of interest rate risk are required to maintain an additional amount of
capital. In March 1995, the OTS delayed indefinitely the implementation of the
interest rate risk component of the risk-based capital standard, which had been
scheduled to be effective September 30, 1994. As calculated at September 30,
1995 (the latest date for which information is available), Palmetto Federal
would have no additional capital requirements under this interest rate risk
rule.
SAFETY AND SOUNDNESS STANDARDS. The Federal Deposit Insurance Act, as
amended by FDICIA and the Riegle Community Development and Regulatory
Improvement Act of 1994, required each federal banking agency to prescribe, for
all insured depository institutions and their holding companies, standards
relating to internal controls, information systems and internal audit systems,
loan documentation, credit underwriting, interest rate exposure, asset growth,
asset quality, earnings, compensation, fees and benefits and such other
operational and managerial standards as the agency deems appropriate. The
federal bank regulatory agencies adopted, effective August 9, 1995, a set of
guidelines prescribing safety and soundness standards pursuant to FDICIA, as
amended. The guidelines establish general standards relating to internal
controls and information systems internal audit systems, loan documentation,
credit underwriting, interest rate exposure, asset growth and compensation,
fees, and benefits. In general, the guidelines require, among other things,
appropriate systems and practices to identify and manage the risks and exposures
specified in the guidelines. The guidelines prohibit excessive compensation as
an unsafe and unsound practice and describe compensation as excessive when the
amounts paid are unreasonable or disproportionate to the services performed by
an executive officer, employee, director, or principal stockholders. In
addition, the agencies adopted regulations that authorize, but do not require,
an agency to order an institution that has been given notice by an agency that
it is not satisfying any of such safety and soundness standards to submit a
compliance plan. If, after being so notified, an institution fails to submit
an acceptable compliance plan or fails in any material respect to implement an
accepted compliance plan or fails in any material respect to implement an
accepted compliance plan, the agency must issue an order directing action to
correct the deficiency and may issue an order directing other actions of the
types to which an undercapitalized association is subject under the "prompt
corrective action" provisions of FDICIA. If an institution fails to comply
with such an order, the agency may seek to enforce such order in judicial
proceedings and to impose civil money penalties. The federal bank regulatory
agencies also proposed guidelines for asset quality and earnings standards.
LIQUIDITY REQUIREMENTS. As a member of the FHLBS, Palmetto Federal is
required to maintain average daily balances with the FHLBA of liquid assets
(cash, certain time deposits, bankers' acceptances, highly rated corporate debt
and commercial paper, securities of certain mutual funds and specified U.S.
government, state or federal agency obligations) equal to not less than a
specified percentage (currently 5%) of the average daily balance during the
preceding calendar month of its net withdrawable accounts plus short-term
borrowings. Member institutions are also required to maintain average daily
balances of short-term liquid assets at a specified percentage (currently 1%)
of the average daily balance during the preceding calendar month of the total
of their net withdrawable accounts and borrowings payable in one year or less.
Monetary penalties may be imposed for failure to meet liquidity requirements.
At December 31, 1995 the long-term liquidity ratio of Palmetto Federal was 7.9%
and the Bank was in compliance with its short-term liquidity requirement.
25
NONRESIDENTIAL REAL ESTATE LOANS LIMIT. OTS regulations limit investments
by a thrift in nonresidential real estate (i.e., loans secured by nonresidential
real property) to 400% of the thrift's capital. At December 31, 1995, Palmetto
Federal was in compliance with this limit.
LOANS TO ONE BORROWER. With certain exceptions, the statutory provision
limiting the ability of national banks to make loans to a single borrower is
now applicable to savings associations in the same manner and to the same
extent as it applies to national banks. In general, national banks may make
loans to one borrower equal to 15% of the bank's unimpaired capital and
unimpaired surplus, plus an additional 10% of capital and surplus for loans
secured by readily marketable collateral. At December 31, 1995, the current
limit of 15% of capital and surplus equated to a limit of approximately $8.2
million.
EQUITY RISK INVESTMENTS. In addition to the Regulatory Capital
Requirements, Palmetto Federal is subject to an "equity risk" regulation which
limits the aggregate amount of its equity risk investments, which are defined
to include investments in real estate, service corporations, operating
subsidiaries and equity securities, as well as land loans and nonresidential
construction loans with loan-to-value ratios greater than 80%. The regulation
also imposes certain qualitative restrictions on otherwise permissible
investments in equity securities. Under the regulation, the equity risk
investments of thrift institutions which meet their minimum regulatory capital
requirements and have "tangible capital" (i.e., equity capital, as determined
in accordance with generally accepted accounting principles, minus goodwill and
other intangible assets, plus qualifying subordinated debt and qualifying
nonpermanent preferred stock) equal to or greater than 6% of total assets may
make aggregate equity risk investments in an amount up to three times their
tangible capital. A thrift institution that meets its regulatory capital
requirements and has tangible capital of less than 6% of total assets may make
aggregate equity risk investments in an amount equal to the greater of 3% of
total assets or two and one-half times tangible capital. Regulatory approval
is required if an institution's equity risk investments exceed the foregoing
limitations or for any equity risk investments by institutions which fail to
meet their minimum Regulatory Capital Requirements. At December 31, 1995,
Palmetto Federal's level of equity risk investments complied with the foregoing
requirements.
QUALIFIED THRIFT LENDER ("QTL") TEST. If Palmetto Federal maintains an
appropriate level of certain investments ("Qualified Thrift Investments") and
otherwise qualifies as a Qualified Thrift Lender ("QTL"), it will continue to
enjoy full borrowing privileges from the FHLBA. If Palmetto Federal should in
the future fail to maintain its status as a QTL (in three of four calendar
quarters in two of every three years), Palmetto Federal would be subject to
certain penalties, including conversion to a bank charter or compliance with
the restrictions imposed for noncompliance.
Under the OTS regulations implementing the QTL Test, Palmetto Federal must
maintain at least 65% of portfolio assets in Qualified Thrift Investments.
Qualified Thrift Investments must equal or exceed 65% of portfolio assets on a
monthly average basis in nine out of every twelve months. Qualified Thrift
Investments include (i) domestic residential or manufactured housing loans,
(ii) home equity loans, (iii) mortgage-backed securities backed by residential
or manufactured housing collateral, (iv) obligations issued by the federal
deposit insurance agencies, and (v) shares of stock issued by any federal home
loan bank. At December 31, 1995, approximately 68.2% of Palmetto Federal's
portfolio assets were invested in Qualified Thrift Investments.
COMMUNITY REINVESTMENT. Under the Community Reinvestment Act (the "CRA"),
Palmetto Federal has an affirmative obligation consistent with its safe and
sound operation to help meet the credit needs of its entire community,
including low and moderate income neighborhoods. The CRA does not establish
specific lending requirements or programs for financial institutions nor does
it limit an institution's discretion to develop the types of products and
services that it believes are best suited to its particular community,
consistent with the CRA. The CRA requires the OTS, in connection with its
examination of an institution, to assess the institution's record of meeting
the credit needs of its community and to take such record into account in its
evaluation of certain applications by such institution. In its most recent CRA
examination of
26
Palmetto Federal in 1993, the OTS assigned the Bank an "Outstanding" regulatory
evaluation for the Bank's fulfillment of the requirements of the CRA.
DIVIDENDS. OTS regulations limit the payment of dividends on common stock
by Palmetto Federal to PALFED. Interest on deposit accounts must be paid prior
to payment of dividends on common stock. Income appropriated to bad debt
reserves and deducted for federal income tax purposes cannot be used to pay cash
dividends without the payment of federal income taxes by Palmetto Federal on
the amount of such income removed from reserves at the then current income tax
rate. Under regulations enforced by the OTS, Palmetto Federal is not permitted
to pay dividends on its common stock if its regulatory capital would thereby be
reduced below the amount required for the liquidation account or the Regulatory
Capital Requirements prescribed for institutions insured by the FDIC. Under OTS
regulations, the ability of a savings association to make capital distributions,
such as dividends, is tied to an institution's capital or "Tier" ranking.
Currently, Palmetto Federal is a "Tier 1" institution and may pay dividends up
to fifty percent of the Bank's net income to PALFED. During the year ended
December 31, 1995, Palmetto Federal did not pay or declare any dividends to
PALFED.
TRANSACTIONS WITH AFFILIATES. Transactions between Palmetto Federal and
an affiliate are subject to the Federal Reserve Act, as amended (the "FRA").
FRA Section 23A limits the aggregate amount of certain transactions with any
single affiliate to 10% of the capital and surplus of the financial institution
and the aggregate amount of such transactions with all affiliates to 20% of the
institution's capital and surplus. Certain transactions with affiliates, such
as loans to affiliates or guaranties, acceptances and letters of credit issued
on behalf of affiliates, are required to be collateralized by collateral in an
amount and of a type described in the statute. The purchase of low quality
assets from affiliates is generally prohibited.
FRA Section 23B requires all transactions with affiliates, including loans
and asset purchases, to be on arms-length terms. FRA Section 22(h), which is
also applicable to thrifts, relates to limits on loans and extensions of credit
by Palmetto Federal to executive officers, directors and 10% shareholders of
the Bank. The Financial Institutions Reform, Recovery, and Enforcement Act of
1989 ("FIRREA") also imposed three additional rules on thrifts: (i) a savings
association may not make any loan or other extension of credit to an affiliate
unless that affiliate is engaged only in activities permissible for bank holding
companies; (ii) a savings association may not purchase or invest in securities
issued by an affiliate, other than securities of a subsidiary; and (iii) the OTS
may for reasons of safety and soundness impose more stringent restrictions on
savings associations than those set forth in Sections 23A, 23B and 22(h) of the
FRA.
The OTS has implemented Sections 23A, 23B and 22(h) of the FRA and the
FIRREA restrictions on transactions with affiliates and has imposed further
restrictions on such transactions in its regulations. The additional
restrictions, in part, require that a savings association retain detailed
records of transactions with affiliates and in certain circumstances, to notify
the OTS prior to any transactions with affiliates. The FDICIA amended Section
22(h) of FRA to impose a new ceiling on the aggregate amount of credit that may
be extended to all insiders. In addition, the OTS has replaced its former
conflict of interest rule, which overlapped with, but was not consistent with
the FRA, with a new rule governing extensions of credit to insiders. This new
rule institutes the lending limitations in Sections 22(h) and 22(g) of the FRA
by incorporating Regulation O of the FRB so that it is now applicable to thrifts
and their insiders.
DEPOSIT INSURANCE
As an insurer, the FDIC issues regulations, conducts examinations and
generally supervises the operations of its insured members. Under the FDIC's
risk-based premium system, the deposit insurance premium assessed against
Palmetto Federal generally depends upon the amount of Palmetto Federal's
deposits and the risk that Palmetto Federal poses to the SAIF. Under these
risk-related insurance regulations, an institution is classified according to
capital and supervisory factors. Institutions are assigned to one of three
capital groups: "well capitalized," "adequately capitalized" or "under
capitalized." Within each capital group, institutions are assigned to one of
three supervisory subgroups. There are nine combinations of groups and
27
subgroups (or assessment risk classifications) to which varying assessment rates
are applicable. These rates range from 23 cents per $100 of domestic deposits
to 31 cents per $100 of domestic deposits. Palmetto Federal has been notified
that its SAIF assessment rate is 26 cents for the period from January 1, 1996 to
June 30, 1996.
Deposit insurance premiums for members of both the Bank Insurance Fund
("BIF") and the SAIF were established for each fund to achieve a 1.25%
designated ratio of reserves to insured deposits. The BIF reached the 1.25%
reserve level in 1995 and in August 1995, the FDIC reduced the premiums for BIF
member banks. In November 1995, the FDIC announced that, beginning in 1996, it
would further reduce the deposit insurance premiums for 92% of all BIF members
that are in the highest capital and supervisory categories to $2,000 per year,
regardless of deposit size. Given the failure of the SAIF to attain the 1.25%
ratio, the FDIC retained the existing premium rate of 23 cents to 31 cents per
$100 of deposits for SAIF members.
In 1995, members of the Banking Committees of the U.S. House of
Representatives and the Senate agreed on a proposal to recapitalize the SAIF.
Under the proposal, which was part of the budget bill, all SAIF-member
institutions will pay a special assessment to the SAIF of approximately 80 basis
points (80 cents per $100 of deposits), the amount that would enable the SAIF to
attain its designated reserve ratio of 1.25%. The special assessment would be
based on the assessable deposits held as of March 31, 1995. BIF-insured
institutions holding SAIF-insured deposits would receive a 20% reduction in the
assessment rate and would pay a special assessment of 64 basis points. The
agreement also provides that the assessment base for the bonds issued in the
late 1980's by the Financing Corporation to recapitalize the now defunct Federal
Savings and Loan Insurance Corporation would be expanded to include deposits of
both BIF-insured and SAIF-insured institutions, with BIF-insured institutions
paying approximately 75% of the interest on such obligations. If an 80 basis
point assessment were levied on the assessable deposits of the Bank held at
March 31, 1995, the special assessment of Palmetto Federal would total $3.9
million. The Company cannot predict either the final details of any legislation
or the effective dates thereof.
In addition to deposit insurance premiums, savings institutions also must
bear a portion of the administrative costs of the OTS through an assessment
based on the level of total assets of each insured institution.
FEDERAL HOME LOAN BANK SYSTEM
Palmetto Federal continues to be a member of the FHLBS, which consists of
12 regional Federal Home Loan Banks subject to supervision and regulation by
the Federal Housing Finance Board ("FHFB"). The FHLBs provide a central credit
facility primarily for member institutions. As a member of the FHLBA, Palmetto
Federal is required to acquire and hold shares of capital stock in the FHLBA in
an amount at least equal to the greater of 1.0% of its residential mortgage
loans or 5% of outstanding FHLBA advances. Palmetto Federal was in compliance
with this requirement with an investment in FHLBA stock at December 31, 1995 of
approximately $10.9 million valued at cost.
The FHLBA serves as a reserve or central bank for member institutions
within its assigned region. It is funded primarily from proceeds derived from
the sale of consolidated obligations of the FHLBS. It makes advances to
members in accordance with policies and procedures established by the FHFB and
the Board of Directors of the FHLBA. Long-term advances may be made only for
the purpose of providing funds for financing residential housing. As of
December 31, 1995 Palmetto Federal had approximately $91.5 million in advances
from the FHLBA.
28
FEDERAL RESERVE SYSTEM
Pursuant to regulations of the FRB, a thrift institution must maintain
average daily reserves equal to a percentage of deposits specified by the FRB.
Because required reserves must be maintained in the form of vault cash or in a
non-interest-bearing account at a Federal Reserve Bank, the effect of the
reserve requirement is to reduce the amount of the institution's interest-
earning assets. As of December 31, 1995 Palmetto Federal met these reserve
requirements.
CERTAIN RESTRICTIONS ON ACQUISITION OF PALFED
REGULATORY RESTRICTIONS
Federal laws and regulations contain a number of provisions which affect
the direct or indirect acquisition of savings institutions such as Palmetto
Federal and, consequently, PALFED. FIRREA repealed the Change in Savings and
Loan Control Act and amended the Change in Bank Control Act ("CIBCA") to, among
other things, apply to savings institutions. The OTS regulations which
implement CIBCA require prior approval of the OTS for acquisitions of control of
savings institutions or savings and loan holding companies. Control is
conclusively presumed to exist if, among other things, a person acquires more
than 25% of any class of voting stock of the institution or holding company or
controls in any manner the election of a majority of the directors of the
insured institution or the holding company. Control is rebuttably presumed to
exist if, among other things, a person acquires more than ten percent of any
class of voting stock (or 25% of any class of stock) and is subject to any of
certain specified "control factors". See "Regulation - Federal Savings and Loan
Holding Company Regulation."
RESTRICTIONS IN THE ARTICLES OF INCORPORATION AND BYLAWS
Several provisions of PALFED's Articles of Incorporation and Bylaws
concerning matters of corporate governance and certain rights of shareholders
might be deemed to have a potential "antitakeover" effect. These provisions
may have the effect of discouraging a future takeover attempt which is not
approved by the Board of Directors, but which individual shareholders of PALFED
may deem to be in their best interest or in which shareholders may receive a
substantial premium for their shares over then current market prices. As a
result, shareholders who might desire to participate in such a transaction may
not have an opportunity to do so. Such provisions will also render the removal
of the current Board of Directors and management more difficult.
BOARD OF DIRECTORS. The Board of Directors of PALFED is divided into three
classes, each of which contains approximately one-third of the aggregate number
of the members of the Board. Each class serves a staggered term, with
approximately one-third of the total number of directors being elected each
year. A classified board of directors could make it more difficult for
shareholders, including those holding a majority of the outstanding shares, to
force an immediate change in the composition of a majority of the board of
directors. Since the terms of only one-third of the incumbent directors expire
each year, it requires at least two annual elections for the shareholders to
change a majority, whereas a majority of a non-classified board may be changed
in one year.
CUMULATIVE VOTING. The Articles of Incorporation of PALFED prohibit
cumulative voting for the election of directors.
BUSINESS COMBINATION PROVISION. PALFED's Articles of Incorporation
provide that PALFED may engage in certain "Business Combination" transactions
(as defined) with an "Interested Shareholder" (as defined) only if approved by
the holders of not less than 80% of the outstanding PALFED stock, unless (i)
the Business Combination is approved by a majority of the "Continuing
Directors" or (ii) the consideration to be received by the shareholders of
PALFED satisfies certain "fair price" criteria. If either of the above two
29
exemptions to the 80% shareholder vote required is present, the shareholder vote
required to approve the Business Combination will be lower. The primary purpose
of this supermajority shareholder vote requirement for a Business Combination is
to discourage attempts by other corporations or groups to acquire control of
PALFED through the acquisition of a substantial number of shares followed by a
forced merger. In such a situation shareholders may not receive a fair price
for their shares as determined through arms-length negotiations. This provision
is designed to prevent a purchaser from utilizing two-tier pricing and similar
tactics in an attempt to take over PALFED, and helps to assure that all
shareholders of PALFED will be treated equally if a merger or other business
combination is effected.
AUTHORIZED SHARES. The Articles of Incorporation authorize the
issuance of 10,000,000 shares of common stock and 5,000,000 shares of
preferred stock. Shareholders of PALFED do not have preemptive rights to
subscribe for or to purchase additional shares of PALFED stock which may be
issued. The Board of Directors has sole authority to determine the terms of
any one or more series of the preferred stock, including voting rights,
conversion rates, and liquidation preferences. As a result of the ability to
fix voting rights for a series of preferred stock, the Board has the power to
issue a series of preferred stock to persons friendly to management in order
to attempt to block a post-tender offer merger or other transaction by which
a third party seeks control, and thereby assist management to retain its
position.
ANTI-TAKEOVER EFFECTS OF MANAGEMENT CONTRACTS AND STOCK PLANS
Certain provisions of the Company's executive salary continuation
agreements, stock option plans, restricted stock grant plan, and the Employee
Savings and Stock Ownership Plan, particularly those pertaining to payments,
benefits and acceleration of vesting periods in the event of a change in
control, may discourage an unfriendly takeover attempt as a result of the
increased cost to be incurred by the Company and the amount of Common Stock
which would be controlled directly by the directors, officers and employees of
the Company and its subsidiaries and indirectly through the Company's stock
plans.
SOUTH CAROLINA CONTROL SHARE ACQUISITION ACT
Sections 35-2-101 through 35-2-111 of the Code of Laws of South Carolina
1976 (the "Control Share Acquisition Act" or the "Act") provide that if a person
acquires in one or a series of related transactions an amount of stock equal to
one-fifth or more of all of the voting power of a corporation subject to the Act
in a "control share acquisition" (as defined in the Act), such shares have only
such voting rights as are accorded them by resolution adopted by the majority of
shareholders of the corporation. As a South Carolina corporation, PALFED is
subject to the Control Share Acquisition Act.
Under the Control Share Acquisition Act, "control shares" are shares
that except for the Act would have voting power that would entitle a person
immediately after acquisition of such shares to exercise or direct voting power
in the election of directors within any of the following ranges of voting power,
(1) one-fifth or more but less than one-third of all voting power, (2) one-third
or more but less than a majority of all voting power, or (3) a majority or more
of all voting power. Pursuant to the Act, a person who makes a control share
acquisition may deliver to a corporation subject to the Act an acquiring person
statement which sets forth (i) the identity of the acquiring person, (ii) a
statement that the acquiring person statement is given pursuant to the Act,
(iii) the number of shares owned by the acquiring person, and each other member
of the acquiring person group, and (iv) the range of voting power (more than
one-fifth but less than one-third, more than one-third but less than a majority,
or a majority or more) under which the control share acquisition falls. Upon
receipt of an acquiring person statement, then the voting rights to be accorded
the control shares must be presented at the next annual or special meeting of
shareholders.
30
TAXATION
PALFED and its subsidiaries file consolidated federal income tax returns
on a December 31 tax year. Savings institutions, such as Palmetto Federal, that
meet certain definitional tests and other conditions prescribed by the Internal
Revenue Code of 1986, as amended (the "Code"), are allowed to establish a bad
debt reserve and may take additions to that reserve as a deduction in computing
taxable income. The amount of the deduction for additions to the bad debt
reserve is based upon the greater of (1) actual loss experience ("the experience
method") or (2) a percentage of taxable income before such deduction ("the
percentage method"). The Tax Reform Act of 1986 set the applicable percentage
at 8% for tax years beginning after December 31, 1986. During 1991 through 1995
PALFED used the experience method.
The bad debt deduction is available only to the extent that the
accumulated bad debt reserve does not exceed 6% of qualifying real property
loans. In addition, the deduction is further limited to the amount by which 12%
of savings accounts at year-end exceeds the sum of surplus, undivided profits,
and reserves at the beginning of the year. Neither of these limitations has
restricted PALFED from making the maximum addition to its bad debt reserve in
the past. No assurance can be given that the maximum addition will be available
in the future. The allowable deduction under either the experience method or
the percentage method is only available if at least 60% of the total dollar
amount of the assets of the company are qualifying assets. As of December 31,
1995, qualified assets of Palmetto Federal exceeded 60% of total assets,
allowing PALFED to utilize these methods. During 1994, the Internal Revenue
Service completed an examination of the Company's consolidated federal income
tax returns through 1991. The examination resulted in an income tax refund of
$1.2 million and interest on the refund of approximately $800,000, net of
related fees and expenses. Subsequent to the completion of the IRS examination,
Palmetto Federal filed amended South Carolina state income tax returns and
received funds and related interest of approximately $275,000.
PALFED and its subsidiaries are subject to South Carolina state income
taxes which are imposed at a rate of 6% of taxable income. South Carolina
taxable income is computed in the same manner as federal taxable income with
certain modifications.
ACCOUNTING FOR INCOME TAXES. PALFED uses the "two difference" method of
accounting for income taxes relating to its bad debt reserves. This method
allows PALFED to record an income tax benefit related to the book reserve, but
recognize no deferred tax liability with respect to the tax base year reserve,
unless it becomes apparent that this temporary difference will reverse in the
foreseeable future. The following events would cause this temporary difference
to become taxable: (1) loss of thrift status by failing to meet the 60% test of
Section 7701(a)(19) of the Code; and (2) conversion of Palmetto Federal's
charter from a thrift to a bank charter. The cumulative amount of this
temporary difference for which PALFED is not required to recognize a deferred
tax liability is equal to the amount of its tax base year reserve as of December
31, 1987 of approximately $2.9 million. A deferred tax liability should be
recognized only with respect to amounts in excess of this tax base year reserve.
See Notes 1 and 8 to the Company's Consolidated Financial Statements, included
in the Company's 1995 Annual Report and incorporated herein by reference.
31
ITEM 2. PROPERTIES.
The Company's corporate headquarters is located at 107 Chesterfield
Street South, Aiken, South Carolina. Palmetto Federal also operates an
operations center and 19 full service banking offices. The Bank's mortgage
lending division operates seven mortgage lending offices in Aiken, Beaufort,
Charleston, Hilton Head Island, North Augusta, and Lexington, South Carolina,
and in Martinez, Georgia. The Bank leases its branches that are located in
Kroger's Supermarkets in North Augusta and Aiken, and its branch located in a
Wal-Mart Superstore in Columbia. Palmetto Federal also leases its Beaufort,
Barton and Charleston branches and each of its mortgage lending offices.
The information set forth in Note 11 of the Company's Consolidated
Financial Statements, included in the Company's 1995 Annual Report is
incorporated herein by reference.
DATA PROCESSING SYSTEMS. Palmetto Federal owns and leases data
processing equipment consisting of computers, terminals and communications
equipment. Palmetto Federal also owns personal computers used for new account
setup, accounting spreadsheets, personnel records, and word processing.
Palmetto Federal conducts in-house data processing of its deposits and loans on
a mainframe computer through the use of applications software licensed by a
third party vendor. The system, which operates in both an on-line, real-time
environment as well as a proof-of-deposit environment, supports teller terminals
and video display terminals located in Palmetto Federal offices and branches.
ITEM 3. LEGAL PROCEEDINGS.
The Bank is periodically involved as plaintiff or defendant in various
legal actions incident to its business, none of which are believed by management
to be material to the financial condition of the Company or its subsidiaries.
On August 3, 1995, the Company and Palmetto Federal filed suit against
the United States in the U.S. Court of Federal Claims seeking damages arising
out of the breach of agreements with the Federal Home Loan Bank Board for the
inclusion of supervisory goodwill in Palmetto Federal's regulatory capital. The
suit relates to the 1982 acquisition by Palmetto Federal of First Federal and
the supervisory goodwill arising from that acquisition. No prediction can be
made as to whether the suit will be successful, or if successful, what damages
might be awarded.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted by the Company to a vote of its shareholders
during the fourth quarter ended December 31, 1995.
32
EXECUTIVE OFFICERS OF PALFED AND ITS SUBSIDIARIES
The executive officers of PALFED and its subsidiaries are as follows:
Position(s) with
Name Age PALFED or Palmetto Federal
---- --- --------------------------
W. Barry Adams 47 Executive Vice President,
Community Banking and Marketing,
of Palmetto Federal, Senior Vice
President of PALFED Investment
Patrick D. Cunning 49 Director, Executive Vice President,
Asset Management, of Palmetto Federal,
President of PSC and WDC
Joe W. DeVore 62 Executive Vice President and Senior
Lending Officer of Palmetto Federal
Howard M. Hickey, Jr. 48 Executive Vice President, General
Counsel and Corporate Secretary
Holly Z. Johnson 39 Senior Vice President, Director of Human
Affairs and Training, of Palmetto
Federal
Darrell R. Rains 39 Executive Vice President, Treasurer and
Chief Financial Officer
Michael B. Smith 39 Senior Vice President and Controller
John C. Troutman 56 President and Chief Executive Officer
Messrs. Troutman, Rains, Hickey and Smith serve in the same capacity for
Palmetto Federal as they do for PALFED.
W. Barry Adams was named an Executive Vice President, Community Banking
and Marketing, of Palmetto Federal in 1992. From 1984 to 1992 he was a Senior
Vice President, Deposit Services, of Palmetto Federal. Mr. Adams joined
Palmetto Federal in 1974.
Patrick D. Cunning is an Executive Vice President of Palmetto Federal
and serves as President of Woodside Development Company of Aiken, Inc. and
Palmetto Service Corporation. Prior to being named President of Palmetto
Service Corporation, Mr. Cunning was Chief Appraiser and Vice President of
Palmetto Service Corporation, which he joined in 1975.
Joe W. DeVore was named Executive Vice President and Senior Lending
Officer of Palmetto Federal in January 1995. Mr. DeVore previously served as
Senior Vice President and Senior Lending Officer of Palmetto Federal since June
1990. Prior to being named Senior Lending Officer, Mr. DeVore was Senior Vice
President, Consumer/Commercial Lending of Palmetto Federal. He joined Palmetto
Federal in December 1981.
33
Howard M. Hickey, Jr. has served as General Counsel of PALFED since 1986
and as Secretary of PALFED since April 1988. Mr. Hickey joined Palmetto Federal
in 1986 as a Vice President and General Counsel, was named Senior Vice President
in 1988, and was named an Executive Vice President, Regulatory Affairs,
Compliance and Security in 1992.
Holly Z. Johnson has served as Senior Vice President of Human Affairs
and Training of Palmetto Federal since January 1994. Ms. Johnson joined
Palmetto Federal in 1986 as Director of Human Resources, was named Assistant
Vice President in 1987 and was named Vice President in 1990.
Darrell R. Rains serves as Executive Vice President, Chief Financial
Officer and Treasurer of PALFED. Prior to being named an Executive Vice
President in 1992, Mr. Rains had served as Senior Vice President and Chief
Financial Officer of PALFED since April 1990 and as Treasurer of PALFED since
1989. Mr. Rains joined Palmetto Federal in June 1984.
Michael B. Smith has served as Senior Vice President since January 1994.
Mr. Smith joined PALFED in April 1989 as Vice President and Controller. From
December 1987 to April 1989, he was an agency accountant with the Federal Home
Loan Bank of Atlanta.
John C. Troutman became the President and Chief Executive Officer of
PALFED and Palmetto Federal on March 1, 1993. Prior to 1993, he held a number
of positions with Citizens and Southern National Bank (now NationsBank), most
recently as the Southeast Florida Commercial Division Manager for NationsBank.
From 1989 to 1992 he was Regional Executive Vice President, East Coast of
Florida for Citizens and Southern National Bank of Florida.
34
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
PALFED's Common Stock is traded in the over-the-counter market and is
quoted in the Nasdaq National Market under the symbol "PALM". As of March 15,
1996, there were approximately 624 shareholders of record. The following table
sets forth the high and low closing prices of the Company's Common Stock for the
periods indicated as reported on the Nasdaq National Market System.
Price Range of Common Stock
---------------------------
High Low
-------- --------
1995
----
First Quarter $ 9.63 $ 7.00
Second Quarter 11.25 8.63
Third Quarter 12.25 11.00
Fourth Quarter 13.25 11.00
1994
----
First Quarter $ 7.25 $ 6.50
Second Quarter 10.75 6.25
Third Quarter 11.13 8.75
Fourth Quarter 9.75 6.87
The Company's ability to pay dividends is limited only by certain
requirements generally imposed on South Carolina corporations. Under South
Carolina law, corporations generally may pay dividends only out of unreserved
and unrestricted earned surplus. Payment of dividends by the Bank to the
Company is subject to certain restrictions and would require prior notice to and
approval of the OTS. PALFED paid no cash dividends in 1994 or 1995.
ITEM 6. SELECTED FINANCIAL DATA.
The selected financial data set forth under "Selected Financial Data"
appearing on page 1 of the Company's 1995 Annual Report is incorporated herein
by reference in response to the information required by this Item.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The information set forth under "Management's Discussion and Analysis"
appearing on pages 6 through 18 of the Company's 1995 Annual Report is
incorporated herein by reference in response to the information required by this
Item.
35
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Consolidated Financial Statements of PALFED, Inc. and
Subsidiaries, together with a report thereon of Coopers & Lybrand L.L.P. dated
February 2, 1996, which report includes an explanatory paragraph concerning
changes in the Company's methods of accounting for impaired loans and mortgage
servicing rights in 1995 and its methods of accounting for certain investments
and the amortization of goodwill in 1993, appearing on pages 19 to 42 of the
Company's 1995 Annual Report are incorporated herein by reference in response
to the information required by this Item.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
PALFED has not, within the twenty-four months preceding its financial
statements as of December 31, 1995, filed or been required to file a Form 8-
K (i) reporting a change of accountants, or (ii) reporting a disagreement on any
matter of accounting principles or practices or financial statement disclosure.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information concerning the directors of PALFED and the executive
officers who are directors of PALFED is set forth in PALFED's Proxy Statement
for the 1996 Annual Meeting of Shareholders to be held on April 23, 1996 (the
"1996 Proxy Statement") under the caption entitled "Election of Directors--
Information as to Nominees and Other Directors" and is incorporated herein by
reference in response to the information required by this Item.
Information concerning executive officers of PALFED is contained in a
separate section entitled "Executive Officers of PALFED and its Subsidiaries" in
Part I of this Report and is incorporated herein by reference in response to the
information required by this Item.
The information concerning compliance with section 16(a) of the
Exchange Act appearing on page 5 of the 1996 Proxy Statement under the heading
"Reports of Beneficial Ownership" is incorporated herein by reference in
response to the information required by this Item.
ITEM 11. EXECUTIVE COMPENSATION.
The information set forth at pages 13 to 17 in the 1996 Proxy
Statement under the heading entitled "Executive Compensation and Other
Information" is incorporated herein by reference in response to the information
required by this Item.
Pursuant to Item 402(a)(9) of Regulation S-K, as promulgated by the
SEC, the material appearing in the 1996 Proxy Statement on pages 9 to 12 under
the headings "Compensation Committee Report" and "Shareholder Return" shall not
be deemed to be "soliciting material" to be "filed" with the SEC or to be
subject to Regulations 14A or 14C, other than as provided in Item 402, or to the
liabilities of Section 18 of the Exchange Act, and no general incorporation of
such material by reference, whether made before or after the date hereof, shall
be deemed to specifically request that it be treated as soliciting material or
specifically incorporate it by reference into a filing under the Securities Act
of 1933, as amended, or the Exchange Act within the meaning of Item 402(a)(9).
36
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information concerning the security ownership of the Company's Common
Stock is set forth in the 1996 Proxy Statement under the heading "Security
Ownership of Certain Beneficial Owners and Management" and is incorporated
herein by reference in response to the information required by this Item.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information set forth under the caption "Transactions with
Officers and Directors" on pages 17 and 18 in the 1996 Proxy Statement is
incorporated herein by reference in response to the information required by this
Item.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) DOCUMENTS.
The consolidated financial statements of PALFED, Inc. and
Subsidiaries contained in the Company's 1995 Annual Report
incorporated by reference in this report are listed below in response
to the information required by this item:
Page
----
(1) Financial Statements:
Consolidated Statements of
Financial Condition 19
Consolidated Statements of Operations 20
Consolidated Statements of
Stockholders' Equity 21
Consolidated Statements of Cash Flows 22
Notes to Consolidated Financial Statements 24
Report of Independent Accountants 42
(2) Financial Statement Schedules:
All schedules have been omitted as the required information is either
inapplicable or shown in the consolidated financial statements or notes thereto.
(3) Exhibits:
3.1 Restated Articles of Incorporation of PALFED, Inc.(1)
3.2 Bylaws of PALFED, Inc., as amended.(2)
10.1* Amended and Restated Incentive Stock Option Plan.(3)
10.2* PALFED, Inc. Employee Savings and Stock Ownership Plan.(4)
10.3* PALFED, Inc. Amended and Restated Director Stock Plan.(5)
10.4* PALFED, Inc. 1993 Stock Option Plan.(6)
37
10.5* PALFED, Inc. 1993 Restricted Stock Incentive Award Plan.(7)
10.6* PALFED, Inc. 1995 Stock Option Plan (8)
10.7 Membership Agreement dated December 27, 1990 between Woodside
Development Company of Aiken, Inc. and Woodside Plantation
Country Club, Inc. for the purchase of club memberships.(9)
10.8 Option Agreement dated December 30, 1993 by and between Woodside
Development Company of Aiken, Inc. and Woodside Development
Limited Partnership.(10)
10.9* Form of Executive Salary Continuation Agreement dated as of
November 22, 1994 among PALFED, Inc., Palmetto Federal Savings
Bank of South Carolina and each of the following officers: John
C. Troutman, W. Barry Adams, Patrick D. Cunning, Joe W. DeVore,
Howard M. Hickey, Jr., Holly Z. Johnson, John Mullen, III,
Darrell R. Rains and Michael B. Smith.(11)
11 Statement Regarding Computation of Per Share Earnings.
13 Annual Report to Shareholders for the year ended December 31,
1995 (except for those portions which are expressly incorporated
by reference in this filing) is furnished for the information of
the SEC and is not to be deemed "filed" as part of this filing.
21 Subsidiaries of the Registrant.
23 Consent of Independent Certified Public Accountants.
27 Financial Data Schedule
99.1 Annual Report on Form 11-K for PALFED, Inc. Employee Savings and
Stock Ownership Plan (to be filed by amendment).
- ----------------------
* Indicates management contract or compensatory plan or arrangement.
(1) Incorporated herein by reference to Exhibit 4.1 to PALFED's
Registration Statement on Form S-2, File Number 33-65338, filed with the
Commission on July 1, 1993.
(2) Incorporated herein by reference to Exhibit 3.2 to PALFED's
Annual Report on Form 10-K for the year ended December 31, 1992, filed with
the Commission on April 14, 1993.
(3) Incorporated herein by reference to Exhibit 4.0 to PALFED's
Registration Statement on Form S-8, File Number 33-23667, filed with the
Commission on August 10, 1988.
(4) Incorporated herein by reference to Exhibit 4.0 to PALFED's Post-
Effective Amendment No. 1 to Registration Statement on Form S-8, File
Number 33-65482, filed with the Commission on September 16, 1994.
(5) Incorporated herein by reference to Exhibit 4.0 to PALFED's Post-
Effective Amendment No. 1 to Registration Statement on Form S-8, File
Number 33-48334, filed with the Commission on June 3, 1995.
(6) Incorporated herein by reference to Exhibit 4.0 to PALFED's
Registration Statement on Form S-8, File Number 33-65484, filed with the
Commission on July 2, 1993.
(7) Incorporated herein by reference to Exhibit 4.0 to PALFED's
Registration Statement on Form S-8, File Number 33-65480, filed with the
Commission on July 2, 1993.
(8) Incorporated herein by reference to Exhibit 4.0 to PALFED's
Registration Statement on Form S-8, File Number 333-00615, filed with the
Commission on February 1, 1996.
38
(9) Incorporated herein by reference to Exhibit 10.4 to PALFED's
Annual Report on Form 10-K for the year ended December 31, 1990, as amended
by Form 8, filed with the Commission on May 24, 1993.
(10) Incorporated by reference to Exhibit 10.9 to PALFED's Annual
Report on Form 10-K for the year ended December 31, 1993, filed with the
Commission on March 31, 1994.
(11) Incorporated by reference to Exhibit 10.8 to PALFED's Annual
Report on Form 10-K for the year ended December 31, 1994, filed with the
Commission on March 31, 1995.
(b) REPORTS ON FORM 8-K.
The Company did not file any reports on Form 8-K during the
fourth quarter ended December 31, 1995.
39
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /s/ John C. Troutman March 26, 1996
---------------------------------
John C. Troutman, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
By: /s/ Albert H. Peters, Jr. March 26, 1996
--------------------------------
Albert H. Peters, Jr.,
Chairman of the Board
By: /s/ John C. Troutman March 26, 1996
--------------------------------
John C. Troutman, President
and Chief Executive Officer
By: /s/ Darrell R. Rains March 26, 1996
--------------------------------
Darrell R. Rains, Executive Vice
President, Treasurer and Chief
Financial Officer
By: /s/ Michael B. Smith March 26, 1996
--------------------------------
Michael B. Smith, Senior Vice President
and Controller
By: /s/ William F. Cochrane March 26, 1996
--------------------------------
William F. Cochrane,
Director
By: /s/ Patrick D. Cunning March 26, 1996
--------------------------------
Patrick D. Cunning,
Director
[Signatures continued on next page]
40
By: /s/ J. Cleveland Holmes March 26, 1996
---------------------------------
J. Cleveland Holmes,
Director
By: /s/ Edward Larry Hutto March 26, 1996
--------------------------------
Edward Larry Hutto,
Director
By: /s/ Harold D. Kingsmore March 26, 1996
--------------------------------
Harold D. Kingsmore,
Director
By: /s/ R. Bruce McBratney March 26, 1996
--------------------------------
R. Bruce McBratney,
Director
By: /s/ Ambrose L. Schwallie March 26, 1996
--------------------------------
Ambrose L. Schwallie,
Director
By: /s/ Charles E. Simons, III March 26, 1996
--------------------------------
Charles E. Simons, III,
Director
By: /s/ Neil W. Trask, Jr. March 26, 1996
--------------------------------
Neil W. Trask, Jr.,
Director
* * *
41
Sequentially
Numbered
Page
------------
INDEX TO EXHIBITS
-----------------
3.1 Restated Articles of Incorporation of PALFED, Inc.(1)
3.2 Bylaws of PALFED, Inc., as amended.(2)
10.1* Amended and Restated Incentive Stock Option Plan.(3)
10.2* PALFED, Inc. Employee Savings and Stock Ownership Plan.(4)
10.3* PALFED, Inc. Amended and Restated Director Stock Plan.(5)
10.4* PALFED, Inc. 1993 Stock Option Plan.(6)
10.5* PALFED, Inc. 1993 Restricted Stock Incentive Award Plan.(7)
10.6* PALFED, Inc. 1995 Stock Option Plan (8)
10.7 Membership Agreement dated December 27, 1990 between Woodside
Development Company of Aiken, Inc. and Woodside Plantation Country
Club, Inc. for the purchase of club memberships.(9)
10.8 Option Agreement dated December 30, 1993 by and between Woodside
Development Company of Aiken, Inc. and Woodside Development Limited
Partnership.(10)
10.9* Form of Executive Salary Continuation Agreement dated as of November
22, 1994 among PALFED, Inc., Palmetto Federal Savings Bank of South
Carolina and each of the following officers: John C. Troutman, W.
Barry Adams, Patrick D. Cunning, Joe W. DeVore, Howard M. Hickey, Jr.,
Holly Z. Johnson, John Mullen, III, Darrell R. Rains and Michael B.
Smith.(11)
11 Statement Regarding Computation of Per Share Earnings.
13 Annual Report to Shareholders for the year ended December 31, 1995
(except for those portions which are expressly incorporated by
reference in this filing) is furnished for the information of the
SEC and is not to be deemed "filed" as part of this filing.
21 Subsidiaries of the Registrant.
23 Consent of Independent Certified Public Accountants.
27 Financial Data Schedule
99.1 Annual Report on Form 11-K for PALFED, Inc. Employee Savings and Stock
Ownership Plan (to be filed by amendment).
- ------------------------
* Indicates management contract or compensatory plan or arrangement.
(1) Incorporated herein by reference to Exhibit 4.1 to PALFED's
Registration Statement on Form S-2, File Number 33-65338, filed with the
Commission on July 1, 1993.
(2) Incorporated herein by reference to Exhibit 3.2 to PALFED's Annual
Report on Form 10-K for the year ended December 31, 1992, filed with the
Commission on April 14, 1993.
42
(3) Incorporated herein by reference to Exhibit 4.0 to PALFED's
Registration Statement on Form S-8, File Number 33-23667, filed with the
Commission on August 10, 1988.
(4) Incorporated herein by reference to Exhibit 4.0 to PALFED's
Post-Effective Amendment No. 1 to Registration Statement on Form S-8, File
Number 33-65482, filed with the Commission on September 16, 1994.
(5) Incorporated herein by reference to Exhibit 4.0 to PALFED's
Post-Effective Amendment No. 1 to Registration Statement on Form S-8, File
Number 33-48334, filed with the Commission on June 3, 1995.
(6) Incorporated herein by reference to Exhibit 4.0 to PALFED's
Registration Statement on Form S-8, File Number 33-65484, filed with the
Commission on July 2, 1993.
(7) Incorporated herein by reference to Exhibit 4.0 to PALFED's
Registration Statement on Form S-8, File Number 33-65480, filed with the
Commission on July 2, 1993.
(8) Incorporated herein by reference to Exhibit 4.0 to PALFED's
Registration Statement on Form S-8, File Number 333-00615, filed with the
Commission on February 1, 1996.
(9) Incorporated herein by reference to Exhibit 10.4 to PALFED's Annual
Report on Form 10-K for the year ended December 31, 1990, as amended by Form 8,
filed with the Commission on May 24, 1993.
(10) Incorporated by reference to Exhibit 10.9 to PALFED's Annual Report on
Form 10-K for the year ended December 31, 1993, filed with the Commission on
March 31, 1994.
(11) Incorporated by reference to Exhibit 10.8 to PALFED's Annual Report on
Form 10-K for the year ended December 31, 1994, filed with the Commission on
March 31, 1995.
43